<PAGE>
SALOMON BROTHERS
Variable Series Funds Inc
Semi-Annual Report 2000
June 30, 2000
. INVESTORS Fund
[LOGO]
<PAGE>
[LOGO]
SALOMON BROTHERS VARIABLE SERIES FUNDS INC
Our Message to You
DEAR SHAREHOLDER:
We are pleased to provide you with the semi-annual report for the Salomon
Brothers Variable Investors Fund ("Fund") for the period ended June 30, 2000.
This letter discusses general economic and market conditions as well as major
Fund developments during the reporting period. A detailed summary of performance
and current Fund holdings can be found in the appropriate sections that follow.
We hope you find this report to be useful and informative.
INVESTMENT STRATEGY1
The Fund continues to focus on stocks with attractive valuations and favorable
earnings growth prospects. And while no guarantees can be made, we are confident
that our value strategy should continue to reward shareholders over time.
PERFORMANCE UPDATE
The Fund's shares returned 9.16% for the six-month period ended June 30, 2000.
In comparison, the Standard & Poor's 500 Index ("S&P 500") returned a negative
0.43% and the Lipper Inc.'s peer group of large cap value funds returned a
negative 1.65% for the same period.2
MARKET REVIEW
In the first half of this year, the stock markets experienced increased
volatility. Technology stocks continued to drive the market through early March.
The momentum behind technology stocks came at the expense of most other sectors
of the market, including consumer staples, financials and pharmaceuticals.
During this period, the Fund added to these out-of-favor sectors. In mid-March,
investors took profits in technology stocks and rotated into undervalued
sectors. Specifically, defensive sectors such as consumer staples, healthcare
and energy all performed well as investors continued to worry about the Federal
Reserve Board's ("Fed") reaction to inflationary pressures. The Fund benefited
from the increase in market breadth.
For the six-month period, the significant decline in a number of large-
capitalization stocks held back the performance of the S&P 500. Microsoft, which
represented 4.9% of the S&P 500 at year-end, declined 31.5%, which alone
penalized the S&P 500 by 1.5 percentage points. Other notable decliners included
Lucent, America Online, AT&T, Home Depot, Procter & Gamble and Qualcomm, all of
which fell more than 20%. Including Microsoft, these eight stocks accounted for
about 13% of the S&P 500 at year-end.
-------------------
1 The information provided represents the opinion of the manager and is not
intended to be a forecast of future events. There is no assurance that
certain securities will remain in or out of the Fund.
2 The Standard & Poor's 500 Index ("S&P 500") is a market
capitalization-weighted measure of 500 widely held common stocks. Lipper,
Inc. is a nationally recognized organization that reports on total return
performance and calculates rankings based on total returns. Total returns
are calculated based on changes in NAV including the reinvestment of
dividends and capital gains. Past performance is not a guarantee of future
results. An investor cannot invest directly in an index.
<PAGE>
HIGHLIGHTS
The Fund performed quite well in the first six months, significantly outpacing
both its large-cap value peer group and the S&P 500. During the first quarter,
we continued to trim most of our technology holdings due to valuation concerns.
We redeployed those proceeds into other sectors of the market that offered much
more attractive valuations. In particular, we added consumer staples, financials
and pharmaceuticals, all of which rebounded as investors rotated out of
technology. Since the correction in technology in mid-March, we have been adding
to selected tech stocks on weakness in the sector. We plan to continue
increasing our weighting in technology as we see opportunities to do so.
Our overweight position in consumer staples contributed to the Fund's
outperformance during the period. In particular, Nabisco Group Holdings, Pepsi
Bottling Group, Safeway and Kimberly Clark all were strong performers. Nabisco
Group Holdings was the Fund's top contributor during the period as a result of
the planned sale of the company.
In other sectors, leading contributors included News Corporation, Intel, Eli
Lilly and Coastal Corp., among others. Laggards included International Paper,
Compuware, Tyson Foods, Federated Department Stores and UnumProvident. The Fund
no longer owns Compuware and UnumProvident.
OUTLOOK
Recent economic data suggest that the economy may be slowing; however,
inflationary concerns are likely to keep the Fed on guard. We expect recent
stock market volatility to persist. Uncertainty over economic growth and
prospective Federal Reserve actions will continue to result in market swings.
Fortunately, market breadth remains favorable.
Currently, the Fund has overweight positions versus the S&P 500 in consumer
staples, communications, energy and financials. As a result of the merger
between Bell Atlantic and GTE, the Fund's top position is now Verizon
Communications, the newly combined entity. The Fund is underweight in
technology, capital goods and consumer cyclicals. As mentioned above, we
continue to look for opportunities to add to technology stocks. Overall, we
believe that the Fund is well positioned for the current market environment in
which individual stock selection plays a more important role than sector
momentum.
We appreciate your investment with the Salomon Brothers Variable Investors Fund
and we look forward to serving your financial needs in the new century.
Cordially,
/s/Heath B. McLendon /s/John B. Cunningham
Heath B. McLendon John B. Cunningham
Chairman and President Vice President
July 27, 2000
2
<PAGE>
The graph to the right depicts the performance of the Investors Fund versus the
Standard & Poor's 500 Stock Index. It is important to note that the Fund is a
professionally managed mutual fund while the index is not available for
investment and is unmanaged. The comparison is shown for illustrative purposes
only.
HISTORICAL PERFORMANCE (unaudited)
SALOMON BROTHERS VARIABLE INVESTORS FUND
Comparison of $10,000 Investment in the Fund with Standard & Poor's 500 Stock
Index
[GRAPH]
Standard & Poor's
Investors Fund 500 Stock Index
2/17/98 10,000 10,000
Jun-98 10,731 11,149
Dec-98 11,056 12,179
Jun-99 12,753 13,684
Dec-99 12,345 14,738
6/30/00 13,473 14,675
Past performance is not predictive of future performance. The graph does not
reflect expenses associated with the separate account such as administrative
fees, account charges and surrender charges which, if reflected, would reduce
the performance shown.
Historical Performance
<TABLE>
<CAPTION>
Net Asset Value
--------------------------
Beginning End Income Capital Gain Total
Period Ended of Period of Period Dividend Distribution Returns+
===============================================================================================================================
<S> <C> <C> <C> <C> <C>
6/30/00 $12.23 $13.35 $0.00 $0.00 9.16%++
-------------------------------------------------------------------------------------------------------------------------------
12/31/99 11.01 12.23 0.06 0.00 11.65
-------------------------------------------------------------------------------------------------------------------------------
Inception*-- 12/31/98 10.00 11.01 0.05 0.00 10.55++
===============================================================================================================================
$0.11 $0.00
===============================================================================================================================
Average Annual Total Returns+
Six Months Ended 6/30/00++ 9.16%
-------------------------------------------------------------------------------------------------------------------------------
Year Ended 6/30/00 5.66
-------------------------------------------------------------------------------------------------------------------------------
Inception* through 6/30/00 13.42
===============================================================================================================================
Cumulative Total Return+
Inception* through 6/30/00 34.73%
===============================================================================================================================
</TABLE>
+ Assumes the reinvestment of all dividends and capital gains distributions
at net asset value. Total returns do not reflect expenses associated with
the separate account such as administrative fees, account charges and
surrender charges which, if reflected, would reduce the total returns for
all periods shown. Total returns may also reflect a voluntary expense cap
imposed by Salomon Brothers Asset Management Inc. to limit total Fund
operating expenses. Absent this expense cap, total returns for the Fund
would be lower. Expense caps may be revised or terminated.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
* Inception date is February 17, 1998.
3
<PAGE>
Schedule of Investments
June 30, 2000 (unaudited)
<TABLE>
<CAPTION>
Shares Security Value
<C> <S> <C>
--------------------------------------------------------------------------------
COMMON STOCK -- 91.4%
Basic Industries -- 2.5%
36,300 Alcoa Inc. ............................................. $ 1,052,700
35,800 International Paper Co. ................................ 1,067,287
-----------
2,119,987
-----------
Capital Goods -- 2.5%
38,200 Honeywell International Inc. ........................... 1,286,862
19,300 Ingersoll-Rand Co. ..................................... 776,825
-----------
2,063,687
-----------
Communications -- 8.9%
14,500 Alltel Corp. ........................................... 898,094
27,600 Bell Atlantic Corp. (b)................................. 1,402,425
4,600 General Motors Corp., Class H Shares (a)................ 403,650
23,200 GTE Corp. (b)........................................... 1,444,200
41,100 SBC Communications Inc. ................................ 1,777,575
33,600 WorldCom, Inc. (a)...................................... 1,541,400
-----------
7,467,344
-----------
Consumer Cyclicals -- 4.7%
48,300 Costco Wholesale Corp. (a).............................. 1,593,900
35,500 Federated Department Stores, Inc. (a)................... 1,198,125
20,800 Target Corporation...................................... 1,206,400
-----------
3,998,425
-----------
Consumer Non-Cyclicals -- 19.4%
9,700 Albertson's, Inc. ...................................... 322,525
32,900 AT&T Corp. - Liberty Media, Class A Shares (a).......... 797,825
51,000 Coca-Cola Enterprises Inc. ............................. 831,937
28,700 Delhaize America, Inc., Class A Shares.................. 507,631
20,300 Kimberly-Clark Corp. ................................... 1,164,713
19,300 McDonald's Corp. ....................................... 635,694
81,000 Nabisco Group Holdings Corp. ........................... 2,100,938
29,000 The News Corp. Ltd. ADR (a)............................. 1,377,500
63,300 The Pepsi Bottling Group, Inc. ......................... 1,847,569
21,800 PepsiCo, Inc. .......................................... 968,738
51,700 Philip Morris Cos. Inc. ................................ 1,373,281
36,300 R.J. Reynolds Tobacco Holdings, Inc. ................... 1,014,131
53,400 Ralston Purina Group.................................... 1,064,663
39,600 Safeway Inc. (a)........................................ 1,786,950
62,200 Tyson Foods, Inc., Class A Shares....................... 544,250
-----------
16,338,345
-----------
Energy -- 6.9%
14,500 Amerada Hess Corp. ..................................... 895,375
24,400 Burlington Resources Inc. .............................. 933,300
45,900 Conoco Inc., Class A Shares (a)......................... 1,009,800
19,800 Royal Dutch Petroleum Co., NY Shares ................... 1,218,938
17,900 Total Fina S.A. ADR..................................... 1,374,944
16,100 USX-Marathon Group...................................... 403,506
-----------
5,835,863
-----------
Financial Services -- 15.5%
13,900 American Express Co. ................................... 724,537
11,100 American General Corp. ................................. 677,100
</TABLE>
See Notes to Financial Statements.
4
<PAGE>
Schedule of Investments
June 30, 2000 (unaudited) (continued)
<TABLE>
<CAPTION>
Shares Security Value
<C> <S> <C>
--------------------------------------------------------------------------------
Financial Services -- 15.5% (continued)
35,300 Associates First Capital Corp. ......................... $ 787,631
38,200 The Bank of New York Co., Inc. ......................... 1,776,300
27,600 The Chase Manhattan Corp. .............................. 1,271,325
17,400 Comerica Inc. .......................................... 780,825
32,100 FleetBoston Financial Group............................. 1,091,400
17,400 Freddie Mac............................................. 704,700
37,200 Household International, Inc. .......................... 1,546,125
37,700 MBNA Corp. ............................................. 1,022,613
14,500 Morgan Stanley Dean Witter & Co. ....................... 1,207,125
17,600 U.S. Bancorp. .......................................... 338,800
39,200 Washington Mutual, Inc. ................................ 1,131,900
-----------
13,060,381
-----------
Health Care -- 8.7%
21,300 Abbott Laboratories, Inc. .............................. 949,181
17,900 American Home Products Corp. ........................... 1,051,625
7,400 Eli Lilly & Co. ........................................ 739,075
19,300 Merck & Co., Inc. ...................................... 1,478,863
21,800 Novartis A.G. ADR (a)................................... 872,000
33,300 Pharmacia Corp. ........................................ 1,721,194
10,600 Schering-Plough Corp. .................................. 535,300
-----------
7,347,238
-----------
Real Estate Investment Trust -- 0.5%
14,500 Equity Office Properties Trust.......................... 399,656
-----------
Technology -- 17.9%
30,100 3Com Corp. (a).......................................... 1,734,513
12,600 Alcatel S.A. ADR........................................ 837,900
8,700 Applied Materials, Inc. (a)............................. 788,437
59,000 Compaq Computer Corp. .................................. 1,508,187
17,900 Computer Associates International, Inc. ................ 916,256
1,700 Corning Inc. ........................................... 458,787
8,700 Hewlett-Packard Co. .................................... 1,086,412
7,300 Intel Corp. ............................................ 975,919
16,400 International Business Machines Corp. .................. 1,796,825
10,600 Micron Technology, Inc. (a)............................. 933,463
14,300 Motorola, Inc. ......................................... 415,594
32,400 National Semiconductor Corp. (a)........................ 1,838,700
16,000 Seagate Technology, Inc. (a)............................ 880,000
12,600 Tellabs, Inc. (a)....................................... 862,313
-----------
15,033,306
-----------
Transportation -- 1.8%
27,100 Canadian National Railway Co. .......................... 790,981
26,100 Canadian Pacific Ltd. .................................. 683,494
-----------
1,474,475
-----------
Utilities -- 2.1%
12,400 The Coastal Corp. ...................................... 754,850
25,100 The Williams Cos., Inc. ................................ 1,046,356
-----------
1,801,206
-----------
TOTAL COMMON STOCK
(Cost -- $69,206,233)................................... 76,939,913
-----------
</TABLE>
See Notes to Financial Statements.
5
<PAGE>
Schedule of Investments
June 30, 2000 (unaudited) (continued)
<TABLE>
<CAPTION>
Face
Amount Security Value
<C> <S> <C>
-------------------------------------------------------------------------------
CONVERTIBLE CORPORATE BONDS -- 0.4%
Communications -- 0.4%
NTL Inc.:
$ 75,000 7.000% due 12/15/08.................................. $ 122,531
225,000 5.750% due 12/15/09 (c).............................. 179,719
-----------
TOTAL CONVERTIBLE CORPORATE BONDS
(Cost -- $302,044)................................... 302,250
-----------
REPURCHASE AGREEMENT -- 8.2%
6,905,000 SBC Warburg Dillon Read Inc., 6.550% due 7/3/00;
Proceeds at maturity -- $6,908,769; (Fully
collateralized by U.S. Treasury Bonds, 7.875% due
2/15/21; Market value -- $7,043,156) (Cost --
$6,905,000)......................................... 6,905,000
-----------
TOTAL INVESTMENTS -- 100%
(Cost -- $76,413,277)................................ $84,147,163
===========
</TABLE>
------
(a) Non-income producing security.
(b) On July 3, 2000, Bell Atlantic Corp. and GTE Corp. merged. The surviving
company was renamed Verizon Communications.
(c) Security is exempt from registration under Rule 144A of the Securities Act
of 1933. This security may be resold in transactions that are exempt from
registration, normally to qualified institutional buyers.
* Aggregate cost for Federal income tax purposes is substantially the same.
Abbreviation used in this schedule:
ADR - American Depository Receipt.
See Notes to Financial Statements.
6
<PAGE>
Statement of Assets and Liabilities
June 30, 2000 (unaudited)
<TABLE>
<S> <C>
ASSETS:
Investments, at value (Cost -- $76,413,277)....................... $84,147,163
Cash.............................................................. 788
Interest and dividends receivable................................. 163,121
Deferred organization costs....................................... 16,450
-----------
Total Assets...................................................... 84,327,522
-----------
LIABILITIES:
Payable for securities purchased.................................. 3,243,976
Management fees payable........................................... 46,084
Administration fees payable....................................... 3,292
Accrued expenses.................................................. 25,123
-----------
Total Liabilities................................................. 3,318,475
-----------
Total Net Assets................................................... $81,009,047
===========
NET ASSETS:
Par value of capital shares....................................... $ 6,069
Capital paid in excess of par value............................... 71,016,175
Undistributed net investment income............................... 376,266
Accumulated net realized gain on investments and options.......... 1,876,651
Net unrealized appreciation of investments........................ 7,733,886
-----------
Total Net Assets................................................... $81,009,047
===========
Shares Outstanding................................................. 6,068,483
-----------
Net Asset Value, per share......................................... $13.35
-----------
</TABLE>
See Notes to Financial Statements.
7
<PAGE>
Statement of Operations
For the Six Months Ended June 30, 2000 (unaudited)
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest.......................................................... $ 158,491
Dividends......................................................... 517,714
Less: Foreign withholding tax..................................... (5,245)
----------
Total Investment Income........................................... 670,960
----------
EXPENSES:
Management fees (Note 2).......................................... 229,196
Administration fees (Note 2)...................................... 16,371
Shareholder communications........................................ 13,426
Audit and legal................................................... 10,938
Custody fees...................................................... 8,354
Registration fees................................................. 4,723
Shareholder and system servicing fees............................. 3,970
Amortization of deferred organization costs....................... 3,114
Directors' fees................................................... 2,366
Other............................................................. 2,236
----------
Total Expenses.................................................... 294,694
----------
Net Investment Income.............................................. 376,266
----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND OPTIONS
(NOTES 3 AND 5):
Realized Gain (Loss) From:
Security transactions (excluding short term securities)........... 2,135,421
Options purchased................................................. (22,282)
Options written................................................... 68,165
----------
Net Realized Gain................................................. 2,181,304
----------
Change in Net Unrealized Appreciation of Investments:
Beginning of period............................................... 3,812,813
End of period..................................................... 7,733,886
----------
Increase in Net Unrealized Appreciation........................... 3,921,073
----------
Net Gain on Investments and Options................................ 6,102,377
----------
Increase in Net Assets From Operations............................. $6,478,643
==========
</TABLE>
See Notes to Financial Statements.
8
<PAGE>
Statements of Changes in Net Assets
For the Six Months Ended June 30, 2000 (unaudited)
and the Year Ended December 31, 1999
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
OPERATIONS:
Net investment income............................... $ 376,266 $ 254,537
Net realized gain (loss)............................ 2,181,304 (17,460)
Increase in net unrealized appreciation............. 3,921,073 2,451,587
----------- -----------
Increase in Net Assets From Operations.............. 6,478,643 2,688,664
----------- -----------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income............................... -- (265,202)
Capital............................................. -- --
----------- -----------
Decrease in Net Assets From Distributions to
Shareholders....................................... -- (265,202)
----------- -----------
FUND SHARE TRANSACTIONS (NOTE 10):
Net proceeds from sale of shares.................... 29,608,665 42,532,124
Net asset value of shares issued for reinvestment of
dividends.......................................... -- 265,202
Cost of shares reacquired........................... (7,620,194) (5,716,552)
----------- -----------
Increase in Net Assets From Fund Share
Transactions....................................... 21,988,471 37,080,774
----------- -----------
Increase in Net Assets............................... 28,467,114 39,504,236
NET ASSETS:
Beginning of period................................. 52,541,933 13,037,697
----------- -----------
End of period*...................................... $81,009,047 $52,541,933
=========== ===========
* Includes undistributed net investment income of: .. $376,266 --
=========== ===========
</TABLE>
See Notes to Financial Statements.
9
<PAGE>
Notes to Financial Statements
(unaudited)
1. Organization and Significant Accounting Policies
Salomon Brothers Variable Investors Fund ("Fund") is a separate diversified
investment portfolio of the Salomon Brothers Variable Series Funds Inc
("Series") whose primary investment objective is to seek long-term growth of
capital and secondarily current income. The Series, a Maryland corporation, is
registered under the Investment Company Act of 1940, as amended ("1940 Act"),
as an open-end management investment company and consists of this Fund and
seven other investment portfolios: Salomon Brothers Variable Capital Fund,
Salomon Brothers Variable Total Return Fund, Salomon Brothers Variable High
Yield Bond Fund, Salomon Brothers Variable Strategic Bond Fund, Salomon
Brothers Variable Small Cap Growth Fund, Salomon Brothers Variable U.S.
Government Income Fund and Salomon Brothers Variable Asia Growth Fund. The U.S.
Government Income Fund and Asia Growth Fund have not yet commenced operations.
The financial statements and financial highlights for the other investment
portfolios are presented in separate shareholder reports. The Fund and each
other investment portfolio of the Series is offered exclusively for use with
certain variable annuity and variable life insurance contracts offered through
the separate accounts of various life insurance companies and qualified pension
and retirement plans.
The significant accounting policies consistently followed by the Fund are: (a)
security transactions are accounted for on trade date; (b) securities traded on
national securities markets are valued at the closing prices on such markets;
securities traded in the over-the-counter market and securities for which no
sales price was reported are valued at the mean of the current bid and asked
prices; debt securities are valued using either prices or estimates of market
values provided by market makers or independent pricing services; securities
and assets for which market quotations are not readily available are valued at
fair value as determined in good faith by or under the direction of the Board
of Directors of the Fund; (c) securities maturing within 60 days are valued at
cost plus accreted discount, or minus amortized premium, which approximates
market value; (d) dividend income is recorded on the ex-dividend date; foreign
dividend income is recorded on the ex-dividend date or as soon as practical
after the Fund determines the existence of a dividend declaration after
exercising reasonable due diligence; (e) interest income, adjusted for
accretion of original issue or market discount, is recorded on the accrual
basis; (f) gains or losses on the sale of securities are calculated by using
the specific identification method; (g) dividends and distributions to
shareholders are recorded on the ex-dividend date; (h) the accounting records
are maintained in U.S. dollars. All assets and liabilities denominated in
foreign currencies are translated into U.S. dollars based on the rate of
exchange of such currencies against U.S. dollars on the date of valuation.
Purchases and sales of securities, and income and expenses are translated at
the rate of exchange quoted on the respective date that such transactions are
recorded. Differences between income and expense amounts recorded and collected
or paid are recorded as currency gains or losses; (i) the character of income
and gains to be distributed are determined in accordance with income tax
regulations which may differ from generally accepted accounting principles. At
December 31, 1999, reclassifications were made to the capital accounts of the
Fund to reflect permanent book/tax differences and income and gains available
for distributions under income tax regulations. Accordingly, a portion of
overdistributed net investment income amounting to $12,084 was reclassified to
paid-in capital. Net investment income, net realized gains and net assets were
not affected by this change; (j) the Fund intends to comply with the applicable
provisions of the Internal Revenue Code of 1986, as amended, pertaining to
regulated investment companies and to make distributions of taxable income
sufficient to relieve the Fund from substantially all Federal income and excise
taxes; and (k) estimates and assumptions are required to be made regarding
assets, liabilities and changes in net assets resulting from operations when
financial statements are prepared. Changes in the economic environment,
financial markets and any other parameters used in determining these estimates
could cause actual results to differ.
Organization costs amounting to $31,250 were incurred with the organization of
the Fund. These costs are being amortized ratably over a five year period from
commencement of operations.
2. Management Agreement and Transactions with Affiliated Persons
Salomon Brothers Asset Management Inc ("SBAM"), a wholly owned subsidiary of
Salomon Brothers Holding Co. Inc., which, in turn, is wholly owned by Salomon
Smith Barney Holdings, Inc. ("SSBH"), acts as investment manager to the Fund.
Under the investment management agreement, the Fund pays an investment
management fee calculated at the annual rate of 0.70% of its average daily net
assets. This fee is calculated daily and paid monthly.
10
<PAGE>
Notes to Financial Statements
(unaudited) (continued)
SBAM also acts as administrator to the Fund. As compensation for its services
the Fund pays SBAM a fee calculated at an annual rate of 0.05% of its average
daily net assets. This fee is calculated daily and paid monthly. SBAM has
delegated its responsibilities as administrator to SSB Citi Fund Management LLC
("SSBC"), formerly known as SSBC Fund Management Inc., an affiliate of SBAM,
pursuant to a Sub-Administration Agreement between SBAM and SSBC.
CFBDS, Inc. acts as the Fund's distributor. For the six months ended June 30,
2000, Salomon Smith Barney Inc., another subsidiary of SSBH, and its affiliates
received brokerage commissions of $276.
3. Investments
During the six months ended June 30, 2000, the aggregate cost of purchases and
proceeds from sales of investments (including maturities, but excluding short-
term securities) were as follows:
<TABLE>
<S> <C>
Purchases........................................................... $42,080,479
===========
Sales............................................................... $18,995,522
===========
</TABLE>
At June 30, 2000, the aggregate gross unrealized appreciation and depreciation
of investments for Federal income tax purposes were substantially as follows:
<TABLE>
<S> <C>
Gross unrealized appreciation...................................... $11,637,403
Gross unrealized depreciation...................................... (3,903,517)
-----------
Net unrealized appreciation........................................ $ 7,733,886
===========
</TABLE>
4. Repurchase Agreements
The Fund purchases (and its custodian takes possession of) U.S. government
securities from banks and securities dealers subject to agreements to resell
the securities to the seller at a future date (generally, the next business
day) at an agreed-upon higher repurchase price. The Fund requires maintenance
of the market value of the collateral in amounts at least equal to the
repurchase price.
5. Options Contracts
The Fund may from time to time enter into options contracts. Premiums paid when
put or call options are purchased by the Fund, represent investments, which are
marked-to-market daily. When a purchased option expires, the Fund will realize
a loss in the amount of the premium paid. When the Fund enters into a closing
sales transaction, the Fund will realize a gain or loss depending on whether
the proceeds from the closing sales transaction are greater or less than the
premium paid for the option. When the Fund exercises a put option, it will
realize a gain or loss from the sale of the underlying security and the
proceeds from such sale will be decreased by the premium originally paid. When
the Fund exercises a call option, the cost of the security which the Fund
purchases upon exercise will be increased by the premium originally paid.
At June 30, 2000, the Fund did not hold any purchased options.
11
<PAGE>
Notes to Financial Statements
(unaudited) (continued)
When the Fund writes a call or put option, an amount equal to the premium
received by the Fund is recorded as a liability, the value of which is marked-
to-market daily. When a written option expires, the Fund realizes a gain equal
to the amount of the premium received. When the Fund enters into a closing
purchase transaction, the Fund realizes a gain or loss depending upon whether
the cost of the closing transaction is greater or less than the premium
originally received, without regard to any unrealized gain or loss on the
underlying security, and the liability related to such option is eliminated.
When a written call option is exercised the proceeds of the security sold will
be increased by the premium originally received. When a written put option is
exercised, the amount of the premium originally received will reduce the cost
of the security which the Fund purchased upon exercise. When written index
options are exercised, settlement is made in cash.
The Fund enters into options for hedging purposes. The risk associated with
purchasing options is limited to the premium originally paid. The risk in
writing a covered call option is that the Fund gives up the opportunity to
participate in any increase in the price of the underlying security beyond the
exercise price. The risk in writing a put option is that the Fund is exposed to
the risk of loss if the market price of the underlying security declines.
The following written call option transactions occurred during the six months
ended June 30, 2000:
<TABLE>
<CAPTION>
Number of
Contracts Premiums
--------- --------
<S> <C> <C>
Options written, outstanding at December 31, 1999........... 220 $117,925
Options exercised .......................................... (52) (43,061)
Options canceled in closing purchase transactions........... (168) (74,864)
---- --------
Options written, outstanding at June 30, 2000............... 0 $ 0
==== ========
</TABLE>
6. Securities Traded on a When Issued Basis
The Fund may from time to time purchase securities on a when-issued basis. In a
when-issued transaction, the Fund commits to purchasing securities which have
not yet been issued by the issuer. Securities purchased on a when-issued basis,
are not settled until they are delivered to the Fund. Beginning on the date the
Fund enters into the when-issued transaction, cash or other liquid securities
are segregated to cover the amount of the purchase price of the when-issued
security. These transactions are subject to market fluctuations and their
current value is determined in the same manner as for other securities.
At June 30, 2000, the Fund did not hold any when-issued securities.
7. Securities Traded on a To-Be-Announced Basis
The Fund may trade securities on a to-be-announced ("TBA") basis. In a TBA
transaction, the Fund commits to purchasing or selling securities for which
specific information is not yet known at the time of the trade, particularly
the face amount and maturity date in Government National Mortgage Association
("GNMA") transactions. Securities purchased on a TBA basis are not settled
until they are delivered to the Fund, normally 15 to 45 days later. Beginning
on the date the Fund enters into a TBA transaction, cash or other liquid
securities are segregated in the amount of the TBA transaction. These
transactions are subject to market fluctuations and their current value is
determined in the same manner as for other securities.
At June 30, 2000, the Fund did not hold any TBA securities.
12
<PAGE>
Notes to Financial Statements
(unaudited) (continued)
8. Lending of Securities
The Fund may lend its securities to brokers, dealers and other financial
organizations. The Fund has an agreement with its custodian whereby the
custodian may lend securities owned by the Fund to brokers, dealers and other
financial organizations. Fees earned by the Fund on securities lending are
recorded in interest income. Loans of securities by the Fund are collateralized
by cash or other liquid securities that are maintained at all times in an
amount at least equal to the current market value of the loaned securities,
plus a margin which may vary depending on the type of securities loaned. The
custodian establishes and maintains the collateral in a segregated account. The
Fund maintains exposure for the risk of any losses in the investment of amounts
received as collateral.
At June 30, 2000, the Fund did not have any securities on loan.
9. Capital Loss Carryforward
At December 31, 1999, the Fund had, for Federal income tax purposes, a capital
loss carryforward of approximately $97,000, available to offset future capital
gains through December 31, 2007. To the extent that these carryforward losses
can be used to offset net realized capital gains, such gains, if any, will not
be distributed.
10. Capital Stock
At June 30, 2000, the Series had 10,000,000,000 shares of capital stock
authorized with a par value of $0.001 per share. Each share represents an equal
proportionate interest and has an equal entitlement to any dividends and
distributions made by the Fund.
Transactions in shares were as follows:
<TABLE>
<CAPTION>
Six Months
Ended Year Ended
June 30, 2000 December 31, 1999
------------- -----------------
<S> <C> <C>
Shares sold.................................... 2,384,383 3,579,315
Shares issued on reinvestment of dividends..... -- 21,756
Shares reacquired.............................. (611,119) (489,624)
--------- ---------
Net Increase................................... 1,773,264 3,111,447
========= =========
</TABLE>
13
<PAGE>
Financial Highlights
For a share of capital stock outstanding for the year ended December 31, except
where noted:
<TABLE>
<CAPTION>
2000(1) 1999 1998(2)
------- ------- -------
<S> <C> <C> <C>
Net Asset Value,
Beginning of Period..... $ 12.23 $ 11.01 $ 10.00
------- ------- -------
Income From Operations:
Net investment income
(3).................... 0.06 0.06 0.05
Net realized and
unrealized gain ....... 1.06 1.22 1.01
------- ------- -------
Total Income From
Operations............. 1.12 1.28 1.06
------- ------- -------
Less Distributions From:
Net investment income... -- (0.06) (0.05)
Capital................. -- -- (0.00)*
------- ------- -------
Total Distributions..... -- (0.06) (0.05)
------- ------- -------
Net Asset Value, End of
Period.................. $ 13.35 $ 12.23 $ 11.01
======= ======= =======
Total Return (4)......... 9.16%++ 11.65% 10.55%++
Net Assets, End of Period
(000s).................. $81,009 $52,542 $13,038
Ratios to Average Net
Assets:
Expenses (3)(5)......... 0.90%+ 0.98% 1.00%+
Net investment income... 1.15+ 0.91 1.14+
Portfolio Turnover Rate.. 31% 51% 62%
</TABLE>
------
(1) For the six months ended June 30, 2000 (unaudited).
(2) For the period from February 17, 1998 (commencement of operations) through
December 31, 1998.
(3) SBAM has waived all or part of its management fees for the year ended
December 31, 1999 and the period ended December 31, 1998. In addition, SBAM
has reimbursed the Fund for $17,030 in expenses for the period ended
December 31, 1998. If such fees were not waived or expenses not reimbursed,
the per share decrease in net investment income and the actual expense
ratio would have been as follows:
<TABLE>
<CAPTION>
Expense Ratios Without
Net Investment Income Fee Waivers and/or
Per Share Decreases Expense Reimbursements
--------------------- ----------------------
<S> <C> <C>
1999............... $0.01 1.15%
1998............... 0.04 2.07+
</TABLE>
(4) Total returns do not reflect expenses associated with the separate account
such as administrative fees, account charges and surrender charges which,
if reflected, would reduce the total returns for all periods shown. Total
returns may also reflect a voluntary expense cap imposed by Salomon
Brothers Asset Management Inc to limit total Fund operating expenses.
Absent this expense cap, total returns for the Fund would be lower. Expense
caps may be revised or terminated.
(5) As a result of a voluntary expense limitation, expense ratios will not
exceed 1.00%.
* Amount represents less than $0.01.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
14
<PAGE>
(This page intentionally left blank.)
<PAGE>
Salomon Brothers Variable Series Funds Inc
INVESTMENT MANAGER
Salomon Brothers Asset Management Inc
7 World Trade Center
New York, New York 10048
CUSTODIAN
PFPC Trust Company
17th and Chestnut Streets
Philadelphia, Pennsylvania 19103
LEGAL COUNSEL
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, New York 10017
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
Directors
CHARLES F. BARBER
Consultant; formerly Chairman; ASARCO Incorporated
CAROL L. COLMAN
Consultant, Colman Consulting
DANIEL P. CRONIN
Vice President-General Counsel,
Pfizer International Inc.
HEATH B. MCLENDON
Chairman and President;
Managing Director, Salomon Smith Barney Inc.
President and Director, SSB Citi Fund Management LLC
and Travelers Investment Advisers, Inc.
Officers
HEATH B. MCLENDON
Chairman and President
LEWIS E. DAIDONE
Executive Vice President and Treasurer
ROSS S. MARGOLIES
Executive Vice President
BETH A. SEMMEL
Executive Vice President
PETER J. WILBY
Executive Vice President
GEORGE J. WILLIAMSON
Executive Vice President
JOHN B. CUNNINGHAM
Vice President
ANTHONY PACE
Controller
CHRISTINA T. SYDOR
Secretary
<PAGE>
[LOGO OF SALOMON BROTHERS ASSET MANAGEMENT]
SEVEN WORLD TRADE CENTER . NEW YORK, NEW YORK 10048
<PAGE>
SALOMON BROTHERS
Variable Series Funds Inc.
Semi-Annual Report 2000
June 30, 2000
.Capital Fund
<PAGE>
SALOMON BROTHERS VARIABLE SERIES FUNDS INC
Our Message to You
DEAR SHAREHOLDER:
We are pleased to provide you with the semi-annual report for the Salomon
Brothers Variable Capital Fund ("Fund") for the period ended June 30, 2000. This
letter discusses general economic and market conditions as well as Fund
highlights during the reporting period. A detailed summary of performance and
current Fund holdings can be found in the appropriate sections that follow. We
hope you find this report useful and informative.
INVESTMENT STRATEGY AND PERFORMANCE UPDATE
The Fund seeks capital appreciation through investments primarily in common
stocks or securities convertible into common stocks. The Fund seeks to achieve
its investment objective through investments in securities that are believed to
have above-average price appreciation potential. The Fund invests primarily in
stocks of U.S. companies. These companies may range in size from established
large capitalization companies (over $5 billion in market capitalization) to
small capitalization companies (i.e., less than $1 billion in market
capitalization) at the beginning of their life cycles. Such investments may also
involve above-average risk. The Fund may invest in seasoned, established
companies, relatively small new companies, as well as new issues.
The Fund's shares returned 16.47% for the six-month period ended June 30, 2000.
In comparison, the Russell 3000 Index returned 0.95% and the Standard and Poor's
500 Index ("S&P 500") declined 0.43% for the same time period. (The S&P 500 is a
market capitalization-weighted measure of 500 widely held common stocks. The
Russell 3000 Index measures the performance of the 3,000 largest U.S. companies
based on total market capitalization, which represents approximately 98% of the
investable U.S. equity market.)
The Fund's investment strategy is known as a broad market strategy. We attempt
to find the best opportunities across the market, wherever they may be. It is an
"all cap" or "multicap" strategy in that we invest in large-, small- and
mid-size companies. Our strategy can also be characterized as a "style neutral"
or "blend" portfolio in that we purchase both growth and value stocks. (Value
investing consists of identifying securities of companies that are believed to
be undervalued in the market. Growth investing focuses on the stocks of
corporations that are exhibiting or are expected to exhibit faster-than-average
growth within their industry.) In fact, one of our primary goals is to find out
of favor value stocks that blossom into growth stocks. These can sometimes
include some of our best performers because we buy them when they are
inexpensive and hold them through the entire period of appreciation as the
market recognizes their true potential.
1
<PAGE>
Because the Fund owns some stocks from most categories, the Fund has the
opportunity to own some promising securities under most market conditions and
our strategy can result in a unique, diversified portfolio of stocks. We think
that these are two key advantages to our investment strategy.1
Our core investment style is a bottom-up stock picking strategy. (Bottom-up
investing is an asset management style that focuses on the analysis of
individual stocks instead of basing decisions on economic or market trends.) We
focus on understanding a company's business, its strategy, its competitive
position and its industry. We also determine if management is credible and has
the right team to lead the company. Our financial analysis focuses on the
company's resources to meet its goals, the consistency of the numbers to
determine their quality (for instance, are receivables growing much faster than
sales?, a sign that current sales may overstate the long term trend) and is used
as a framework for valuation and risk assessment. These and other factors are
what drive our stock selection process. If we think that the risk and reward
trade-off for a particular company's stock is favorable, we will generally
invest.
As portfolio managers, we have a role in addition to stock picking; we need to
put all the individual security selections into a portfolio that meets a set of
investment objectives. We use tools such as diversification and position
weighting to determine exactly how much of each security to own in the
portfolio. For instance, in the Fund, our best ideas generally get very high
weightings, as much as 5% of the portfolio on occasion. This strategy, known as
high position concentration, can generate above-market return potential if
executed properly. (Of course, past performance is not indicative of future
results.)
At the same time, we always factor in excess risk. A good idea that has a very
high-risk profile tends to get lower weighting, such as 1% of the portfolio, in
order to diversify risk and dampen portfolio volatility. And while no guarantees
can be made, this way we can take individual risks on behalf of our shareholders
without creating an overly risky portfolio.
----------------
1 Of course, investors can also lose money in the sub-account if our judgement
about the attractiveness, relative value or potential appreciation of a
particular sector or security proves to be incorrect.
2
<PAGE>
MARKET OVERVIEW AND OUTLOOK
Even though it made no headway, the stock market offered something for everyone
during the first half of 2000. Initially the speculative momentum market of 1999
helped the market rally continue, peaking during the second week of March. The
Federal Reserve Board's ("Fed") continued increases in interest rates then
started to be felt, leading to a violent sell-off, particularly in the volatile
NASDAQ market, through May. At the same time, many oversold "Old Economy" stocks
rallied as money rotated from the Internet and biotech stocks into areas such as
consumer staples. By the end of the half, most of the market losses were
recovered so that most broad indices were down modestly.
One way to describe what happened is that "investment gravity" finally took hold
of stocks that previously seemed to continually float skyward. The catalyst was
the seemingly unrelated comments by U.S. President Bill Clinton and British
Prime Minister Tony Blair that genomics companies would not reap all of the
benefits of the public research money devoted to their field of science. The
sell-off in biotech stocks spread like contagion to all high-priced growth
stocks. For a relatively brief time, earnings counted and stories were
discounted. By the end of June, the market was once again awarding future
potential a premium to proven ability.
The Fund's investment strategy worked exceptionally well throughout the
six-month period. When the market was rising our broad, diversified equity
exposure allowed us to participate even though much of what we liked was out of
favor. The declines in less speculative stocks provided us with opportunities as
well. For the first time in over two years, we were given an attractive
opportunity to start building positions in drug stocks, a sector that we think
should exhibit above-average growth well into the future due to favorable
demographic and technological trends.
Later in the half, during the NASDAQ-led market decline, the Fund actually
appreciated as money flowed to companies that could be more easily valued, most
of which had been materially oversold in the previous few months. The rotation
favored drug stocks as well as companies we previously owned such as Safeway,
Nabisco Group Holdings and Devon Energy while giving us the opportunity to add
to undervalued technology stocks like 3Com and Seagate. Going forward, we expect
to continue to hold many of these stocks although there have been tender offers
announced for Nabisco and Seagate.
3
<PAGE>
We continue to see the growth of the Internet as one of the driving forces of
the economy going forward. If you closely examine the Fund's portfolio, you will
see that relatively little of your money is invested in traditional Internet
companies (i.e., the "dot.coms"). We think the long-term risk and reward
proposition in most of these companies to be unattractive, a view we think the
market is starting to embrace. We also think most of these companies do not have
sustainable business models (translation: in our opinion they will always lose
money), while others have valuations that assume they will be the only survivors
in the eventual shakeout. However, you will see a lot of your money invested in
companies that benefit from or build the Internet. In the Fund we own companies
such as...
. 3Com (a company that split into two pieces in July; Palm Pilot, the leading
PDA which will offer wireless internet access, and the remaining 3Com
networking business helping individuals access the Internet);
. Federated Department Stores (a leader in the "clicks and mortar" e-commerce
strategy and owner of several valuable Internet businesses); and
. Verizon (formed from the merger of Bell Atlantic and GTE, Verizon is the
leading U.S. wireless company also offering telecom services such as local,
long distance and high-speed Internet access).
It is our strong belief that over time the leading established companies that
embrace today's new technologies should emerge as the dominant and most
profitable companies in the economy. Their stocks should recognize this over
time. On the other hand, we believe the stock market will continue to lose
patience with those traditional Internet companies that cannot transform
themselves into growth companies with enough profits to support their stock
price.
We expect the Fund to consistently apply its investment strategy in the future.
We will invest in both users and manufacturers of technology when we believe
their risk reward ratios are favorable. Most of all, we will look for the best
opportunities that we can find, regardless of the part of the market they
currently reside in.
4
<PAGE>
Thank you for your investment in the Salomon Brothers Variable Capital Fund. We
look forward to helping you pursue your financial goals in the new century.
Sincerely,
/S/ Heath B. McLendon /S/ Ross B. Margolies
Heath B. McLendon Ross S. Margolies
Chairman and President Executive Vice President
July 25, 2000
5
<PAGE>
The following graph depicts the performance of the Capital Fund versus the
Russell 3000 Index. It is important to note that the Fund is a professionally
managed mutual fund while the index is not available for investment and is
unmanaged. The comparison is shown for illustrative purposes only.
HISTORICAL PERFORMANCE (unaudited)
SALOMON BROTHERS VARIABLE CAPITAL FUND
Comparison of$10,000 Investment in the Fund with the Russell 3000 Index
[GRAPH]
Capital Fund Russell 3000 Index
2/17/98 10,000 10,000
Jun-98 10,971 10,932
Dec-98 11,812 11,788
Jun-99 13,374 13,123
Dec-99 14,420 14,246
6/30/00 16,794 14,382
Past performance is not predictive of future performance. The graph does not
reflect expenses associated with the separate account such as administrative
fees, account charges and surrender changes which, if reflected, would reduce
the performance shown.
Historical Performance
<TABLE>
<CAPTION>
Net Asset Value
-------------------
Beginning End Income Capital Gain Total
Period Ended of Period of Period Dividend Distribution Returns+
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
6/30/00 $13.67 $15.69 $0.00 $0.23 16.47%++
--------------------------------------------------------------------------------------
12/31/99 11.57 13.67 0.07 0.39 22.08
--------------------------------------------------------------------------------------
Inception*-- 12/31/98 10.00 11.57 0.09 0.15 18.12++
--------------------------------------------------------------------------------------
$0.16 $0.77
--------------------------------------------------------------------------------------
</TABLE>
Average Annual Total Returns+
--------------------------------------------------------------------------------
Six Months Ended 6/30/00++ 16.47%
--------------------------------------------------------------------------------
Year Ended 6/30/00 25.58
--------------------------------------------------------------------------------
Inception* through 6/30/00 24.49
--------------------------------------------------------------------------------
Cumulative Total Return+
--------------------------------------------------------------------------------
Inception* through 6/30/00 67.94%
--------------------------------------------------------------------------------
+ Assumes the reinvestment of all dividends and capital gains distributions
at net asset value. Total returns do not reflect expenses associated with
the separate account such as administrative fees, account charges and
surrender charges which, if reflected, would reduce the total returns for
all periods shown. Total returns may also reflect a voluntary expense cap
imposed by Salomon Brothers Asset Management Inc to limit total Fund
operating expenses. Absent this expense cap, total returns for the Fund
would be lower. Expense caps may be revised or terminated.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
* Inception date is February 17, 1998.
6
<PAGE>
Schedule of Investments
June 30, 2000 (unaudited)
<TABLE>
<CAPTION>
Shares Security Value
<C> <S> <C>
-------------------------------------------------------------------------------
COMMON STOCK -- 91.5%
Basic Industries -- 6.1%
33,500 AK Steel Holding Corp............................... $ 268,000
21,200 Crown Cork & Seal Co., Inc.......................... 318,000
24,600 The Geon Co......................................... 455,100
14,500 International Paper Co.............................. 432,281
63,000 LTV Corp............................................ 181,125
3,800 Olin Corp........................................... 62,700
16,400 OM Group, Inc....................................... 721,600
----------
2,438,806
----------
Capital Goods -- 1.1%
78,800 Harnischfeger Industries, Inc. (a).................. 26,792
10,400 Ingersoll-Rand Co. ................................. 418,600
----------
445,392
----------
Communications -- 12.2%
10,400 Bell Atlantic Corp. (b)............................. 528,450
20,700 Dobson Communications Corp., Class A Shares (a)..... 398,475
20,300 Genuity Inc. (a).................................... 185,872
10,200 GTE Corp. (b)....................................... 634,950
21,100 ICG Communications, Inc. (a)........................ 465,519
2,600 NTL Inc. (a)........................................ 155,675
Rogers Cantel Mobile Communications Inc., Class B
16,500 Shares (a).......................................... 554,812
9,900 SBC Communications Inc. ............................ 428,175
47,500 Sinclair Broadcast Group, Inc., Class A Shares (a).. 522,500
8,300 UnitedGlobalCom Inc., Class A Shares (a)............ 388,025
12,500 WorldCom, Inc. (a).................................. 573,437
----------
4,835,890
----------
Consumer Cyclicals -- 10.8%
33,900 Abercrombie & Fitch Co., Class A Shares (a)......... 413,156
36,800 Costco Wholesale Corp. (a).......................... 1,214,400
36,600 Federated Department Stores, Inc. (a)............... 1,235,250
10,971 Fine Host Corp. (a)(c) ............................. 102,892
22,600 PRIMEDIA Inc. (a)................................... 514,150
16,500 Sun International Hotels Ltd. (a)................... 330,000
28,700 Wendy's International, Inc. ........................ 511,219
----------
4,321,067
----------
Consumer Non-Cyclicals -- 25.6%
13,000 AT&T Corp. - Liberty Media, Class A Shares (a)...... 315,250
33,000 Delhaize America, Inc., Class B Shares.............. 507,375
16,400 The Gillette Co. ................................... 572,975
5,200 Hannaford Bros. Co. ................................ 373,750
14,700 Hearst-Argyle Television, Inc., Class A Shares (a).. 286,650
65,400 Hormel Foods Corp. ................................. 1,099,537
23,200 John B. Sanfilippo & Son, Inc. (a).................. 68,150
25,300 Michael Foods, Inc. ................................ 619,850
62,100 Nabisco Group Holdings Corp. ....................... 1,610,719
12,400 The News Corp. Ltd. ADR ............................ 589,000
37,000 The Pepsi Bottling Group, Inc. ..................... 1,079,937
14,500 PepsiCo, Inc. ...................................... 644,344
16,600 Philip Morris Cos. Inc. ............................ 440,937
36,800 Safeway Inc. (a).................................... 1,660,600
37,500 Tyson Foods, Inc., Class A Shares................... 328,125
----------
10,197,199
----------
</TABLE>
See Notes to Financial Statements.
7
<PAGE>
Schedule of Investments
June 30, 2000 (unaudited) (continued)
<TABLE>
<CAPTION>
Shares Security Value
<C> <S> <C>
------------------------------------------------------------------------------
Energy -- 8.4%
32,500 3TEC Energy Corp. (a)............................... $ 325,000
8,900 Caminus Corp. (a)................................... 218,050
16,800 Conoco Inc., Class B Shares ........................ 412,650
12,300 Devon Energy Corp. ................................. 691,106
21,600 Paradigm Geophysical Ltd. (a)....................... 129,600
11,600 R&B Falcon Corp. (a)................................ 273,325
21,100 Suncor Energy, Inc. ................................ 491,894
78,200 Tesoro Petroleum Corp. (a).......................... 791,775
----------
3,333,400
----------
Financial Services -- 6.9%
16,500 The Bank of New York Co., Inc. ..................... 767,250
20,700 Banknorth Group, Inc. .............................. 316,969
8,400 Comerica Inc. ...................................... 376,950
12,300 FleetBoston Financial Corp. ........................ 418,200
18,600 Mercantile Bankshares Corp. ........................ 554,512
12,200 Protective Life Corp. .............................. 324,825
----------
2,758,706
----------
Health Care -- 6.0%
Health Management Associates, Inc., Class A Shares
16,600 (a)................................................. 216,838
12,300 Merck & Co., Inc. .................................. 942,488
14,900 Novartis AG, ADR (a)................................ 596,000
4,300 Nycomed Amersham PLC, Sponsored ADR................. 210,700
8,200 Schering-Plough Corp. .............................. 414,100
----------
2,380,126
----------
Technology -- 14.4%
18,700 3Com Corp. (a)...................................... 1,077,588
8,300 Advanced Micro Devices, Inc. (a).................... 641,175
14,300 ASM International N.V. (a).......................... 378,950
16,600 Compaq Computer Corp. .............................. 424,338
5,000 Comverse Technology, Inc. (a)....................... 465,000
13,500 Cypress Semiconductor Corp. (a)..................... 570,375
16,400 Digital Microwave Corp. (a)......................... 625,250
200 Exfo Electro-Optical Engineering Inc. (a)........... 8,775
3,700 International Business Machines Corp. .............. 405,381
13,100 Latitude Communications, Inc. (a)................... 146,556
600 Marvell Technology Group Ltd. (a)................... 34,200
100 Netease.com, Inc., ADR (a).......................... 1,213
14,600 Organic, Inc. (a)................................... 142,350
900 Plantronics Inc. (a)................................ 103,950
6,200 Seagate Technology, Inc. (a)........................ 341,000
20,500 SpeedFam-IPEC, Inc. (a)............................. 372,844
----------
5,738,945
----------
TOTAL COMMON STOCK
(Cost -- $32,880,308)............................... 36,449,531
----------
</TABLE>
See Notes to Financial Statements.
8
<PAGE>
Schedule of Investments
June 30, 2000 (unaudited) (continued)
<TABLE>
<CAPTION>
Face
Amount Security Value
<C> <S> <C>
-------------------------------------------------------------------------------
CONVERTIBLE CORPORATE BONDS -- 1.8%
Consumer Cyclicals -- 1.1%
Sunbeam Corp., Sr. Sub. Debentures:
$1,000,000 Zero coupon due 3/25/18 (d)........................... $ 162,500
1,750,000 Zero coupon due 3/25/18 .............................. 284,375
-----------
446,875
-----------
Energy -- 0.7%
455,000 Friede Goldman Halter Inc., 4.500% due 9/15/04........ 275,844
-----------
TOTAL CONVERTIBLE CORPORATE BONDS
(Cost -- $732,508).................................... 722,719
-----------
CORPORATE BONDS -- 1.4%
Capital Goods -- 1.3%
Harnischfeger Industries, Inc., Debentures:
160,000 8.900% due 3/1/22 (a)(e).............................. 61,600
175,000 8.700% due 6/15/22 (a)(e)............................. 67,375
950,000 7.250% due 12/15/25 (a)(e)............................ 365,750
40,000 6.875% due 2/15/27 (a)(e)............................. 15,400
-----------
510,125
-----------
Consumer Cyclicals -- 0.0%
15,000 Breed Technologies Inc., Sr. Sub. Notes, 9.250% due
4/15/08 (d)........................................... 169
-----------
Financial Services -- 0.1%
Contifinancial Corp., Sr. Notes:
125,000 7.500% due 3/15/02 (a)(e)............................. 15,625
195,000 8.125% due 4/1/08 (a)(e).............................. 24,375
-----------
40,000
-----------
TOTAL CORPORATE BONDS
(Cost -- $649,341).................................... 550,294
-----------
<CAPTION>
Contracts
<C> <S> <C>
-------
PURCHASED OPTIONS (a) -- 0.2%
99 DoubleClick Inc., Put @ 35, Expire 7/22/00............ 22,584
20 Interactive Index, Put @ 450, Expire 7/22/00.......... 16,750
4 Interactive Index, Put @ 480, Expire 7/22/00.......... 6,700
8 Interactive Index, Put @ 400, Expire 8/19/00.......... 7,000
8 S&P 500 Index, Put @ 1400, Expire 7/22/00............. 5,300
8 S&P 500 Index, Put @ 1420, Expire 7/22/00............. 9,700
-----------
TOTAL PURCHASED OPTIONS
(Cost -- $103,067).................................... 68,034
-----------
<CAPTION>
Face
Amount
<C> <S> <C>
-------
REPURCHASE AGREEMENT -- 5.1%
$2,026,000 SBC Warburg Dillon Read Inc., 6.550% due 7/3/00;
Proceeds at maturity -- $2,027,106;
(Fully collateralized by U.S. Treasury Bonds, 8.875%
due 8/15/17; Market value -- $2,067,158)
(Cost -- $2,026,000).................................. 2,026,000
-----------
TOTAL INVESTMENTS -- 100%
(Cost -- $36,391,224*)................................ $39,816,578
===========
</TABLE>
------
(a) Non-income producing security.
(b) On July 3, 2000, Bell Atlantic Corp. and GTE Corp. merged. The surviving
company was renamed Verizon Communications.
(c) Fair valued at June 30, 2000.
(d) Security is exempt from registration under Rule 144A of the Securities Act
of 1933. This security may be resold in transactions that are exempt from
registration, normally to qualified institutional buyers.
(e) Security is currently in default.
* Aggregate cost for Federal income tax purposes is substantially the same.
Abbreviation used in this schedule:
ADR -- American Depository Receipt.
See Notes to Financial Statements.
9
<PAGE>
Statement of Assets and Liabilities
June 30, 2000 (unaudited)
<TABLE>
<S> <C>
ASSETS:
Investments, at value (Cost -- $36,391,224)....................... $39,816,578
Cash.............................................................. 175
Receivable for securities sold.................................... 74,071
Dividend and interest receivable.................................. 36,698
Deferred organization costs....................................... 16,450
-----------
Total Assets...................................................... 39,943,972
-----------
LIABILITIES:
Payable for securities purchased.................................. 305,844
Management fees payable........................................... 22,740
Administration fees payable....................................... 1,560
Accrued expenses.................................................. 16,097
-----------
Total Liabilities................................................. 346,241
-----------
Total Net Assets.................................................. $39,597,731
===========
NET ASSETS:
Par value of capital shares....................................... $ 2,523
Capital paid in excess of par value............................... 34,048,703
Undistributed net investment income............................... 113,353
Accumulated net realized gain from security transactions and
options.......................................................... 2,007,798
Net unrealized appreciation on investments........................ 3,425,354
-----------
Total Net Assets................................................... $39,597,731
===========
Shares Outstanding................................................. 2,523,025
-----------
Net Asset Value, per share......................................... $15.69
-----------
</TABLE>
See Notes to Financial Statements.
10
<PAGE>
Statement of Operations
For the Six Months Ended June 30, 2000 (unaudited)
<TABLE>
<S> <C>
INVESTMENT INCOME:
Dividends......................................................... $ 159,461
Interest.......................................................... 90,121
Less: Foreign withholding tax..................................... (532)
----------
Total Investment Income........................................... 249,050
----------
EXPENSES:
Management fees (Note 2).......................................... 115,342
Audit and legal................................................... 10,865
Shareholder communications........................................ 10,443
Custody........................................................... 8,918
Administration fees (Note 2)...................................... 6,785
Shareholder and system servicing fees............................. 3,671
Amortization of deferred organization costs....................... 3,114
Directors' fees................................................... 2,366
Registration fees................................................. 1,238
Other............................................................. 1,647
----------
Total Expenses.................................................... 164,389
Less: Management fee waiver (Note 2).............................. (28,692)
----------
Net Expenses...................................................... 135,697
----------
Net Investment Income.............................................. 113,353
----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND OPTIONS
(NOTES 3 AND 5):
Realized Gain (Loss) From:
Security transactions (excluding short-term securities)........... 2,105,203
Options purchased................................................. (46,253)
Options written................................................... 31,264
----------
Net Realized Gain................................................. 2,090,214
----------
Change in Net Unrealized Appreciation of Investments:.............
Beginning of period............................................... 1,347,506
End of period..................................................... 3,425,354
----------
Increase in Net Unrealized Appreciation........................... 2,077,848
----------
Net Gain on Investments and Options................................ 4,168,062
----------
Increase in Net Assets From Operations............................. $4,281,415
==========
</TABLE>
See Notes to Financial Statements.
11
<PAGE>
Statements of Changes in Net Assets
For the Six Months Ended June 30, 2000 (unaudited)
and the Year Ended December 31, 1999
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
OPERATIONS:
Net investment income............................... $ 113,353 $ 71,981
Net realized gains.................................. 2,090,214 853,176
Increase in net unrealized appreciation............. 2,077,848 866,650
----------- -----------
Increase in Net Assets From Operations.............. 4,281,415 1,791,807
----------- -----------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income............................... -- (71,981)
Net realized gains.................................. (495,032) (438,071)
----------- -----------
Decrease in Net Assets From Distributions to
Shareholders....................................... (495,032) (510,052)
----------- -----------
FUND SHARE TRANSACTIONS (NOTE 9):
Net proceeds from sale of shares.................... 21,116,577 13,806,423
Net asset value of shares issued for reinvestment of
dividends.......................................... 495,032 510,052
Cost of shares reacquired........................... (1,989,628) (3,698,746)
----------- -----------
Increase in Net Assets From Fund Share
Transactions....................................... 19,621,981 10,617,729
----------- -----------
Increase in Net Assets............................... 23,408,364 11,899,484
NET ASSETS:
Beginning of period................................. 16,189,367 4,289,883
----------- -----------
End of period*...................................... $39,597,731 $16,189,367
=========== ===========
*Includes undistributed net investment income of:.... $113,353 --
=========== ===========
</TABLE>
See Notes to Financial Statements.
12
<PAGE>
Notes to Financial Statements
(unaudited)
1. Organization and Significant Accounting Policies
Salomon Brothers Variable Capital Fund ("Fund") is a separate non-diversified
investment portfolio of the Salomon Brothers Variable Series Funds Inc
("Series") whose primary investment objective is to seek capital appreciation.
The Series, a Maryland corporation, is registered under the Investment Company
Act of 1940, as amended ("1940 Act"), as an open-end management investment
company and consists of this Fund and seven other investment portfolios:
Salomon Brothers Variable Small Cap Growth Fund, Salomon Brothers Variable
Total Return Fund, Salomon Brothers Variable High Yield Bond Fund, Salomon
Brothers Variable Investors Fund, Salomon Brothers Variable Strategic Bond
Fund, Salomon Brothers Variable U.S. Government Income Fund and Salomon
Brothers Variable Asia Growth Fund. The U.S. Government Income Fund and Asia
Growth Fund have not yet commenced operations. The financial statements and
financial highlights for the other investment portfolios are presented in
separate shareholder reports. The Fund and each other investment portfolio of
the Series is offered exclusively for use with certain variable annuity and
variable life insurance contracts offered through the separate accounts of
various life insurance companies and qualified pension and retirement plans.
The significant accounting policies consistently followed by the Fund are: (a)
security transactions are accounted for on trade date; (b) securities traded on
national securities markets are valued at the closing prices on such markets;
securities traded in the over-the-counter market and securities for which no
sales price was reported are valued at the mean of the current bid and asked
prices; debt securities are valued using either prices or estimates of market
values provided by market makers or independent pricing services; securities
and assets for which market quotations are not readily available are valued at
fair value as determined in good faith by or under the direction of the Board
of Directors of the Fund; (c) securities maturing within 60 days are valued at
cost plus accreted discount, or minus amortized premium, which approximates
market value; (d) dividend income is recorded on the ex-dividend date; (e)
interest income, adjusted for accretion of original issue or market discount,
is recorded on the accrual basis; (f) gains or losses on the sale of securities
are calculated by using the specific identification method; (g) dividends and
distributions to shareholders are recorded on the ex-dividend date; (h) the
accounting records are maintained in U.S. dollars. All assets and liabilities
denominated in foreign currencies are translated into U.S. dollars based on the
rate of exchange of such currencies against U.S. dollars on the date of
valuation. Purchases and sales of securities, and income and expenses are
translated at the rate of exchange quoted on the respective date that such
transactions are recorded. Differences between income and expense amounts
recorded and collected or paid are recorded as currency gains or losses (i) the
character of income and gains to be distributed are determined in accordance
with income tax regulations which may differ from generally accepted accounting
principles; (j) the Fund intends to comply with the applicable provisions of
the Internal Revenue Code of 1986, as amended, pertaining to regulated
investment companies and to make distributions of taxable income sufficient to
relieve the Fund from substantially all Federal income and excise taxes; and
(k) estimates and assumptions are required to be made regarding assets,
liabilities and changes in net assets resulting from operations when financial
statements are prepared. Changes in the economic environment, financial markets
and any other parameters used in determining these estimates could cause actual
results to differ.
Organization costs amounting to $31,250 were incurred with the organization of
the Fund. These costs are being amortized ratably over a five-year period from
commencement of operations.
2. Management Agreement and Transactions with Affiliated Persons
Salomon Brothers Asset Management Inc ("SBAM"), a wholly owned subsidiary of
Salomon Brothers Holding Company Inc., which, in turn, is wholly owned by
Salomon Smith Barney Holdings, Inc. ("SSBH"), acts as investment manager to the
Fund. Under the investment management agreement, the Fund pays an investment
management fee calculated at the annual rate of 0.85% of its average daily net
assets. This fee is calculated daily and paid monthly.
For the six months ended June 30, 2000, SBAM waived a portion of the management
fees payable by the Fund amounting to $28,692.
13
<PAGE>
Notes to Financial Statements
(unaudited) (continued)
SBAM also acts as administrator to the Fund. As compensation for its services
the Fund pays SBAM a fee calculated at an annual rate of 0.05% of its average
daily net assets. This fee is calculated daily and paid monthly. SBAM has
delegated its responsibilities as administrator to SSB Citi Fund Management LLC
("SSBC"), an affiliate of SBAM, pursuant to a Sub-Administration Agreement
between SBAM and SSBC.
CFBDS, Inc. acts as the Fund's distributor. For the six months ended June 30,
2000, Salomon Smith Barney Inc. ("SSB"), another subsidiary of SSBH, received
brokerage commissions of $54 from the Fund.
3. Investments
During the six months ended June 30, 2000, the aggregate cost of purchases and
proceeds from sales of investments (including maturities, but excluding short-
term securities) were as follows:
<TABLE>
<S> <C>
Purchases........................................................... $31,174,788
===========
Sales............................................................... $11,587,530
===========
</TABLE>
At June 30, 2000, the aggregate gross unrealized appreciation and depreciation
of investments for Federal income tax purposes were substantially as follows:
<TABLE>
<S> <C>
Gross unrealized appreciation...................................... $ 5,682,675
Gross unrealized depreciation...................................... (2,257,321)
-----------
Net unrealized appreciation........................................ $ 3,425,354
===========
</TABLE>
4. Repurchase Agreements
The Fund purchases (and its custodian takes possession of) U.S. government se-
curities from banks and securities dealers subject to agreements to resell the
securities to the seller at a future date (generally, the next business day) at
an agreed-upon higher repurchase price. The Fund requires maintenance of the
market value of the collateral in amounts at least equal to the repurchase
price.
5. Options Contracts
The Fund may from time to time enter into options contracts. Premiums paid when
put or call options are purchased by the Fund, represent investments, which are
marked-to-market daily. When a purchased option expires, the Fund will realize
a loss in the amount of the premium paid. When the Fund enters into a closing
sales transaction, the Fund will realize a gain or loss depending on whether
the proceeds from the closing sales transaction are greater or less than the
premium paid for the option. When the Fund exercises a put option, it will re-
alize a gain or loss from the sale of the underlying security and the proceeds
from such sale will be decreased by the premium originally paid. When the Fund
exercises a call option, the cost of the security which the Fund purchases upon
exercise will be increased by the premium originally paid.
At June 30, 2000, the Fund had purchased put options with a total cost of
$103,067.
14
<PAGE>
Notes to Financial Statements
(unaudited) (continued)
When the Fund writes a call or put option, an amount equal to the premium re-
ceived by the Fund is recorded as a liability, the value of which is marked-to-
market daily. When a written option expires, the Fund realizes a gain equal to
the amount of the premium received. When the Fund enters into a closing pur-
chase transaction, the Fund realizes a gain or loss depending upon whether the
cost of the closing transaction is greater or less than the premium originally
received, without regard to any unrealized gain or loss on the underlying secu-
rity, and the liability related to such option is eliminated. When a written
call option is exercised the proceeds of the security sold will be increased by
the premium originally received. When a written put option is exercised, the
amount of the premium originally received will reduce the cost of the security
which the Fund purchased upon exercise. When written index options are exer-
cised, settlement is made in cash.
The Fund enters into options for hedging purposes. The risk associated with
purchasing options is limited to the premium originally paid. The risk in
writing a covered call option is that the Fund gives up the opportunity to
participate in any increase in the price of the underlying security beyond the
exercise price. The risk in writing a put option is that the Fund is exposed to
the risk of loss if the market price of the underlying security declines.
The following written put option transactions occurred during the six months
ended June 30, 2000:
<TABLE>
<CAPTION>
Number of
Contracts Premiums
--------- --------
<S> <C> <C>
Options written, outstanding at December 31, 1999.......... -- $ 0
Options written during the six months ended June 30, 2000.. 14 55,956
Options canceled in closing purchase transactions.......... (14) (55,956)
--- -------
Options written, outstanding at June 30, 2000.............. -- $ 0
=== =======
</TABLE>
6. Securities Traded on a When Issued Basis
The Fund may from time to time purchase securities on a when-issued basis. In a
when-issued transaction, the Fund commits to purchasing securities which have
not yet been issued by the issuer. Securities purchased on a when-issued basis,
are not settled until they are delivered to the Fund. Beginning on the date the
Fund enters into the when-issued transaction, cash and other liquid securities
are segregated to cover the amount of the purchase price of the when-issued
security. These transactions are subject to market fluctuations and their
current value is determined in the same manner as for other securities.
At June 30, 2000 the Fund did not hold any when-issued securities.
7. Securities Traded on a To-Be-Announced Basis
The Fund may trade securities on a to-be-announced ("TBA") basis. In a TBA
transaction, the Fund commits to purchasing or selling securities for which
specific information is not yet known at the time of the trade, particularly
the face amount and maturity date in Government National Mortgage Association
("GNMA") transactions. Securities purchased on a TBA basis are not settled
until they are delivered to the Fund, normally 15 to 45 days later. Beginning
on the date the Fund enters into a TBA transaction, cash or other liquid
securities are segregated to cover the amount of the TBA transaction. These
transactions are subject to market fluctuations and their current value is
determined in the same manner as for other securities.
At June 30, 2000, the Fund did not hold any TBA securities.
15
<PAGE>
Notes to Financial Statements
(unaudited) (continued)
8. Lending of Securities
The Fund may lend its securities to brokers, dealers and other financial
organizations. The Fund has an agreement with its custodian whereby the
custodian may lend securities owned by the Fund to brokers, dealers and other
financial organizations. Fees earned by the Fund on securities lending are
recorded in interest income. Loans of securities by the Fund are collateralized
by cash and other liquid securities that are maintained at all times in an
amount at least equal to the current market value of the loaned securities,
plus a margin which may vary depending on the type of securities loaned. The
custodian establishes and maintains the collateral in a segregated account. The
Fund maintains exposure for the risk of any losses in the investment of amounts
received as collateral.
At June 30, 2000 the Fund did not have any securities on loan.
9. Capital Stock
At June 30, 2000 the Series had 10,000,000,000 shares of capital stock autho-
rized with a par value of $0.001 per share. Each share represents an equal pro-
portionate interest and has an equal entitlement to any dividends and distribu-
tions made by the Fund.
Transactions in shares were as follows:
<TABLE>
<CAPTION>
Six Months Ended Year Ended
June 30, 2000 December 31, 1999
---------------- -----------------
<S> <C> <C>
Shares sold............. 1,444,504 1,068,547
Shares issued on
reinvestment of
dividends.............. 31,835 37,504
Shares reacquired....... (137,696) (292,353)
--------- ---------
Net Increase............ 1,338,643 813,698
========= =========
</TABLE>
16
<PAGE>
Financial Highlights
For a share of capital stock outstanding throughout each year ended December
31, except where noted:
<TABLE>
<CAPTION>
2000(1) 1999 1998(2)
------- ------- -------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period............. $ 13.67 $ 11.57 $10.00
------- ------- ------
Income From Operations:
Net investment income (3)....................... 0.04 0.07 0.09
Net realized and unrealized gains............... 2.21 2.49 1.72
------- ------- ------
Total Income From Operations.................... 2.25 2.56 1.81
------- ------- ------
Less Distributions From:
Net investment income........................... -- (0.07) (0.09)
Net realized gains.............................. (0.23) (0.39) (0.15)
------- ------- ------
Total Distributions............................. (0.23) (0.46) (0.24)
------- ------- ------
Net Asset Value, End of Period................... $ 15.69 $ 13.67 $11.57
======= ======= ======
Total Return (4)................................. 16.47%++ 22.08% 18.12%++
Net Assets, End of Period (000s)................. $39,598 $16,189 $4,290
Ratios to Average Net Assets:
Expenses (3)(5)................................. 1.00%+ 1.00% 1.00%+
Net investment income........................... 0.84%+ 0.99% 1.35%+
Portfolio Turnover Rate.......................... 45% 119% 116%
</TABLE>
------
(1) For the six months ended June 30, 2000 (unaudited).
(2) For the period from February 17, 1998 (commencement of operations) through
December 31, 1998.
(3) SBAM has waived all or a part of its management fees for the six months
ended June 30, 2000, the year ended December 31, 1999 and the period ended
December 31, 1998. In addition, SBAM has reimbursed the Fund for $13,177
and $33,776 in expenses for the year ended December 31, 1999 and the period
ended December 31, 1998, respectively. If such fees were not waived or ex-
penses not reimbursed, the per share decrease in net investment income and
the actual expense ratio would have been as follows:
<TABLE>
<CAPTION>
Net Investment Income Expense Ratios Without Fee
Per Share Decreases Waivers and Reimbursement
--------------------- --------------------------
<S> <C> <C>
2000............ $0.01 1.21%+
1999............ 0.06 1.99
1998............ 0.15 3.26+
</TABLE>
(4) Total returns do not reflect expenses associated with the separate account
such as administrative fees, account charges and surrender charges which,
if reflected, would reduce the total returns for all periods shown. Total
returns may also reflect a voluntary expense cap imposed by Salomon Broth-
ers Asset Management Inc to limit total Fund operating expenses. Absent
this expense cap, total returns for the Fund would be lower. Expense caps
may be revised or terminated.
(5) As a result of a voluntary expense limitation, expense ratios will not ex-
ceed 1.00%.
++ Total return is not annualized, as it may not be representative of the total
return for the year.
+ Annualized.
17
<PAGE>
(This page intentionally left blank.)
<PAGE>
Salomon Brothers Variable Series Funds Inc
INVESTMENT MANAGER
Salomon Brothers Asset Management Inc
7 World Trade Center
New York, New York 10048
CUSTODIAN
PFPC Trust Company
17th and Chestnut Streets
Philadelphia, Pennsylvania 19103
LEGAL COUNSEL
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, New York 10017
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLC
1177 Avenue of the Americas
New York, New York 10036
Directors
CHARLES F. BARBER
Consultant; formerly Chairman; ASARCO Incorporated
CAROL L. COLMAN
Consultant, Colman Consulting
DANIEL P. CRONIN
Vice President--General Counsel,
Pfizer International Inc.
HEATH B. MCLENDON
Chairman and President;
Managing Director, Salomon Smith Barney Inc.
President and Director, SSB Citi Fund Management LLC
and Travelers Investment Advisers, Inc.
Officers
HEATH B. MCLENDON
Chairman and President
LEWIS E. DAIDONE
Executive Vice President and Treasurer
ROSS S. MARGOLIES
Executive Vice President
BETH A. SEMMEL
Vice President
PETER J. WILBY
Executive Vice President
GEORGE J. WILLIAMSON
Executive Vice President
JOHN B. CUNNINGHAM
Vice President
ANTHONY PACE
Controller
CHRISTINA T. SYDOR
Secretary
<PAGE>
----------------
Salomon Brothers
----------------
Asset Management
SEVEN WORLD TRADE CENTER . NEW YORK, NEW YORK 10048
<PAGE>
SALOMON BROTHERS
Variable Series Funds Inc
Semi-
Annual
Report
2000
JUNE 30, 2000
. TOTAL RETURN FUND
<PAGE>
SALOMON BROTHERS VARIABLE SERIES FUNDS INC
Our Message to You
Dear Shareholder:
We are pleased to provide the semi-annual report for the Salomon Brothers
Variable Total Return Fund ("Fund") for the period ended June 30, 2000. This
letter discusses general economic and market conditions as well as major Fund
developments during the reporting period. A detailed summary of performance and
current Fund holdings can be found in the appropriate sections that follow. We
hope you find this report to be useful and informative.
Investment Strategy and Performance Update
The Fund seeks to obtain above-average income compared to a portfolio that
invests only in stocks. The Fund's secondary objective is to take advantage of
opportunities for growth of capital and income by investing in a variety of
asset classes including stocks, bonds and short-term obligations. For the six
months ended June 30, 2000, the Fund generated a return of 3.13%. In comparison,
the Standard & Poor's 500 Index ("S&P 500")(1) returned a negative 0.43% for the
period. In addition, a return for a hypothetical Index consisting of a 50%
weighting of the Salomon Smith Barney Broad Investment Grade ("BIG") Bond
Index(2) and 50% weighting of the S&P 500(3) returned 1.87% for the same time
period. (Please note that an investor cannot invest directly in an index.)
Market Update and Outlook
In the first half of 2000, the common stock sector continued to emphasize high
quality companies in growth industries including communications, pharmaceutical,
energy, consumer brands and technology. The fixed-income segment represents
approximately 50% of the portfolio in order to reduce overall risk and provide
added income potential.
As the Federal Reserve Board ("Fed") moves to slow the economy, we anticipate
moderate growth in the U.S. and continuing improvement in most of the major
overseas countries. Earnings for U.S. companies should be restrained somewhat
during the coming year.
_________________
1 The S&P 500 is a market capitalization-weighted measure of 500 widely held
common stocks.
2 The Salomon Smith Barney BIG Bond Index includes institutionally traded U.S.
Treasury bonds, government-sponsored bonds (U.S. Agency and supranational),
mortgage-backed securities and corporate securities.
3 The 50% Salomon Smith Barney BIG Bond Index and 50% S&P 500 consists of
domestic corporate, government and agency securities and 500 widely held
common stocks.
1
<PAGE>
In a period of economic growth, the common stock portfolio is being positioned
in companies with financial strength and in areas where we believe product
demand will be firm. As of June 30, 2000, the largest holdings of common stock,
in order of size were IBM, Pfizer, Coca-Cola, Anheuser-Busch, Merck, McDonald's,
Johnson & Johnson and General Electric. Please keep in mind, portfolio holdings
are subject to change.
Thank you for your investment in the Salomon Brothers Variable Total Return
Fund. We look forward to helping you pursue your financial goals in the new
century.
Sincerely,
/s/ Heath B. McLendon /s/ George J. Williamson
Heath B. McLendon George J. Williamson
Chairman and President Executive Vice President
July 25, 2000
2
<PAGE>
The following graph depicts the performance of the Total Return Fund versus the
Salomon Smith Barney Broad Investment Grade Bond Index, the Standard & Poor's
500 Stock Index and the 50% Salomon Smith Barney Broad Investment Grade Bond and
50% Standard & Poor's 500 Stock Index. It is important to note that the Fund is
a professionally managed mutual fund while the indexes are not available for
investment and are unmanaged. The comparison is shown for illustrative purposes
only.
--------------------------------------------------------------------------------
HISTORICAL PERFORMANCE (unaudited)
SALOMON BROTHERS VARIABLE TOTAL RETURN FUND
Comparison of $10,000 Investment in the Fund with Salomon Smith Barney Broad
Investment Grade Bond Index, Standard & Poor's 500 Stock Index and 50% Salomon
Smith Barney Broad Investment Grade Bond and 50% Standard & Poor's 500 Stock
Index
--------------------------------------------------------------------------------
[GRAPH]
<TABLE>
<CAPTION>
50% SSB Broad
SSB Broad Investment Grade
Total Return S&P 500 Investment Bond and 50% S&P
Fund Stock Index Grade Bond Index 500 Stock Index
------------ ----------- ---------------- ----------------
<S> <C> <C> <C> <C>
2/17/98 10,000 10,000 10,000 10,000
Jun-98 10,260 11,149 10,271 10,710
Dec-98 10,583 12,177 10,741 11,459
Jun-99 11,092 13,680 10,592 12,136
Dec-99 10,666 14,733 10,651 12,692
6/30/00 10,999 14,668 11,069 12,868
</TABLE>
Past performance is not predictive of future performance. The graph does not
reflect expenses associated with the separate account such as administrative
fees, account charges and surrender charges which, if reflected, would reduce
the performance shown.
--------------------------------------------------------------------------------
Historical Performance
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Asset Value
----------------------
Beginning End Income Capital Gain Return Total
Period Ended of Period of Period Dividends Distributions of Capital Returns+
==========================================================================================================
<S> <C> <C> <C> <C> <C> <C>
6/30/00 $10.23 $10.55 $0.00 $0.00 $0.00 3.13%++
----------------------------------------------------------------------------------------------------------
12/31/99 10.40 10.23 0.24 0.00 0.01 0.78
----------------------------------------------------------------------------------------------------------
Inception* -- 12/31/98 10.00 10.40 0.15 0.03 0.00 5.83++
==========================================================================================================
$0.39 $0.03 $0.01
==========================================================================================================
</TABLE>
--------------------------------------------------------------------------------
Average Annual Total Returns+
--------------------------------------------------------------------------------
Six Months Ended 6/30/00++ 3.13%
--------------------------------------------------------------------------------
Year Ended 6/30/00 (0.83)
--------------------------------------------------------------------------------
Inception* through 6/30/00 4.11
================================================================================
--------------------------------------------------------------------------------
Cumulative Total Return+
--------------------------------------------------------------------------------
Inception* through 6/30/00 9.99%
================================================================================
+ Assumes the reinvestment of all dividends and capital gains distributions
at net asset value. Total returns do not reflect expenses associated with
the separate account such as administrative fees, account charges and
surrender charges which, if reflected, would reduce the total returns for
all periods shown. Total returns may also reflect a voluntary expense cap
imposed by Salomon Brothers Asset Management Inc to limit total Fund
operating expenses. Absent this expense cap, total returns for the Fund
would be lower. Expense caps may be revised or terminated.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
* Inception date is February 17, 1998.
3
<PAGE>
Schedule of Investments
June 30, 2000 (unaudited)
<TABLE>
<CAPTION>
Shares Security Value
<C> <S> <C>
--------------------------------------------------------------------------------
COMMON STOCK -- 47.9%
Basic Industries -- 0.1%
5,900 USEC Inc. ............................................. $ 27,288
----------
Capital Goods -- 1.7%
1,300 Cooper Industries, Inc. ............................... 42,330
4,800 General Electric Co. .................................. 254,400
2,000 Honeywell International Inc. .......................... 67,375
----------
364,105
----------
Communications -- 4.6%
4,650 AT&T Corp. ............................................ 147,055
1,800 BCE Inc. .............................................. 42,862
2,600 Bell Atlantic Corp. (a)................................ 150,412
2,826 Nortel Networks Corp. ................................. 192,875
2,600 Qwest Communications International Inc. ............... 222,950
2,300 SBC Communications Inc. ............................... 99,475
2,650 WorldCom, Inc. (b)..................................... 121,568
----------
977,197
----------
Consumer Cyclicals -- 2.8%
4,100 Costco Wholesale Corp. ................................ 135,300
1,174 DaimlerChrysler AG..................................... 61,121
2,300 Eastman Kodak Co. ..................................... 136,850
5,000 Kmart Corp. ........................................... 34,063
2,100 Sears, Roebuck & Co. .................................. 68,513
2,800 Wal-Mart Stores, Inc. ................................. 161,350
----------
597,197
----------
Consumer Non-Cyclicals -- 11.6%
4,300 Anheuser-Busch Companies, Inc.......................... 321,156
4,100 Avon Products, Inc. ................................... 182,450
5,700 The Coca-Cola Co. ..................................... 327,394
1,966 Delhaize America, Inc., Class B Shares................. 30,227
5,000 The Gillette Co. ...................................... 174,688
3,600 H.J. Heinz Co. ........................................ 157,500
5,600 Hormel Foods Corp. .................................... 94,150
1,800 Kimberly-Clark Corp. .................................. 103,275
7,900 McDonald's Corp. ...................................... 260,206
2,400 The News Corp. Ltd., ADR (b)........................... 114,000
5,100 PepsiCo, Inc. ......................................... 226,631
3,700 The Procter & Gamble Co. .............................. 211,825
2,100 Ralston-Ralston Purina Group........................... 41,869
3,200 Safeway Inc. (b)....................................... 144,400
4,600 Sara Lee Corp. ........................................ 88,838
----------
2,478,609
----------
Energy -- 2.8%
1,400 Amerada Hess Corp. .................................... 86,450
1,794 BP Amoco PLC, ADR...................................... 101,473
1,600 Exxon Mobil Corp. ..................................... 125,600
1,700 Royal Dutch Petroleum Co. ............................. 104,656
2,500 Schlumberger Ltd. ..................................... 186,563
----------
604,742
----------
Financial Services -- 6.4%
8,200 The Allstate Corp...................................... 182,450
1,255 American International Group, Inc...................... 147,463
</TABLE>
See Notes to Financial Statements.
4
<PAGE>
Schedule of Investments
June 30, 2000 (unaudited) (continued)
<TABLE>
<CAPTION>
Shares Security Value
<C> <S> <C>
--------------------------------------------------------------------------------
Financial Services -- 6.4% (continued)
3,500 Associates First Capital Corp. ....................... $ 78,094
2,778 Bank of America Corp. ................................ 119,454
96 Berkshire Hathaway Inc., Class B Shares (b)........... 168,960
3,000 Chase Manhattan Corp. ................................ 138,188
1,800 The Chubb Corp. ...................................... 110,700
1,600 CIGNA Corp. .......................................... 149,600
3,000 First Union Corp. .................................... 74,438
2,200 FleetBoston Financial Corp. .......................... 74,800
4,700 Horace Mann Educators Corp. .......................... 70,500
1,900 Mercantile Bankshares Corp. .......................... 56,644
-----------
1,371,291
-----------
Health Care -- 8.6%
4,600 Abbott Laboratories................................... 204,988
3,300 American Home Products Corp. ......................... 193,875
2,300 Bausch & Lomb Inc. ................................... 177,963
2,400 Bristol-Myers Squibb Co. ............................. 139,800
2,500 Johnson & Johnson..................................... 254,688
3,600 Merck & Co., Inc. .................................... 275,850
8,600 Pfizer Inc. .......................................... 412,800
3,570 Pharmacia Corp. ...................................... 184,524
-----------
1,844,488
-----------
Technology -- 7.6%
3,500 Alcatel SA, ADR....................................... 232,750
5,600 Compaq Computer Corp. ................................ 143,150
700 Energizer Holdings, Inc. (b).......................... 12,775
700 Intel Corp. .......................................... 93,581
6,300 International Business Machines Corp. ................ 690,244
3,500 Lucent Technologies Inc. ............................. 207,375
6,500 The Reynolds & Reynolds Co., Class A Shares........... 118,625
6,100 Xerox Corp. .......................................... 126,575
-----------
1,625,075
-----------
Transportation -- 0.9%
2,700 Canadian National Railway Co. ........................ 78,806
1,800 Union Pacific Corp. .................................. 66,938
600 United Parcel Services, Inc., Class B Shares.......... 35,400
-----------
181,144
-----------
Utilities -- 0.8%
2,300 American Electric Power Co., Inc. .................... 68,137
2,800 Edison International.................................. 57,400
1,200 Reliant Energy, Inc. ................................. 35,475
-----------
161,012
-----------
TOTAL COMMON STOCK
(Cost -- $10,169,298)................................. 10,232,148
-----------
</TABLE>
See Notes to Financial Statements.
5
<PAGE>
Schedule of Investments
June 30, 2000 (unaudited) (continued)
<TABLE>
<CAPTION>
Face
Amount Security Value
<C> <S> <C>
-------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCIES & OBLIGATIONS -- 17.9%
U.S. Treasury Notes:
$ 290,000 6.000% due 8/15/04 (c)................................ $ 287,370
250,000 6.000% due 8/15/09 (c)................................ 248,045
U.S. Treasury Bonds:
500,000 6.125% due 8/15/29 (c)................................ 505,750
200,000 6.250% due 5/15/30.................................... 210,000
Federal Home Loan Mortgage Corp. (FHLMC), 6.250% due
275,000 7/15/04............................................... 267,781
Federal National Mortgage Association (FNMA):
440,025 6.500% due 7/1/28..................................... 414,997
206,228 7.000% due 2/1/29..................................... 199,138
100,000 7.000% due 15 years (d)(e)............................ 98,093
465,000 6.000% due 30 years (d)(e)............................ 425,326
360,000 7.000% due 30 years (d)(e)............................ 347,400
300,000 7.500% due 30 years (d)(e)............................ 295,779
525,000 8.000% due 30 years (d)(e)............................ 527,131
----------
TOTAL U.S. GOVERNMENT AGENCIES & OBLIGATIONS
(Cost -- $3,893,504).................................. 3,826,810
----------
CORPORATE BONDS & NOTES -- 10.1%
Basic Industries -- 0.7%
50,000 Raytheon Co., Notes, 6.150% due 11/1/08............... 44,437
100,000 USX Corp., Notes, 7.200% due 2/15/04.................. 98,375
----------
142,812
----------
Capital Goods -- 0.3%
75,000 Tyco International Group, 6.125% due 1/15/09.......... 66,938
----------
Consumer Cyclicals -- 1.2%
DaimlerChrysler N.A. Holding Corp., Medium-Term Notes,
150,000 Company Guaranteed, 7.750% due 5/27/03................ 151,125
100,000 Wal-Mart Stores, Inc., Notes, 7.550% due 2/15/30...... 102,500
----------
253,625
----------
Energy -- 1.0%
150,000 Duke Energy Corp., Sr. Notes, 7.375% due 3/1/10....... 147,750
75,000 Union Oil Co., 7.350% due 6/15/09..................... 72,938
----------
220,688
----------
Financial/Leasing -- 4.7%
300,000 Bank of America Corp., Sr. Notes, 7.875% due 5/16/05.. 303,750
Countrywide Home Loan, Co., Medium-Term Notes, 6.250%
50,000 due 4/15/09........................................... 43,812
Fremont General Corp., Series B, Sr. Notes, 7.700% due
100,000 3/17/04............................................... 42,500
Lehman Brothers Holdings Inc., Sr. Sub. Notes, 7.250%
175,000 due 4/15/03........................................... 172,813
Morgan Stanley Dean Witter & Co., Notes, 7.750% due
150,000 6/15/05............................................... 150,938
150,000 Paine Webber Group Inc., 7.625% due 12/1/09........... 141,938
150,000 Sears Roebuck Acceptance Corp., 7.000% due 6/15/07.... 141,750
----------
997,501
----------
Media & Telecommunications -- 1.1%
A.H. Belo Corp., Sr. Debentures, 7.250% due 9/15/27
90,000 (c)................................................... 74,025
75,000 GTE Corp., Debentures, 6.940% due 4/15/28 (c)......... 66,468
100,000 Sprint Capital Corp., 5.700% due 11/15/03............. 94,875
----------
235,368
----------
Real Estate Investment Trust -- 0.5%
100,000 Spieker Properties, Inc. LP, 7.250% due 5/1/09........ 93,250
----------
Services & Other -- 0.6%
140,000 Cendant Corp., 7.750% due 12/1/03 (c)................. 135,275
----------
TOTAL CORPORATE BONDS & NOTES
(Cost -- $2,261,683).................................. 2,145,457
----------
</TABLE>
See Notes to Financial Statements.
6
<PAGE>
Schedule of Investments
June 30, 2000 (unaudited) (continued)
<TABLE>
<CAPTION>
Face
Amount Security Value
<C> <S> <C>
-------------------------------------------------------------------------------
ASSET-BACKED SECURITIES -- 2.7%
Contimortgage Home Equity Loan Trust, Series 1998-2,
$ 141,266 Class A3, 6.130% due 3/15/13......................... $ 140,552
NationsBank Credit Card Master Trust, Series 1995-1,
250,000 Class A, 6.450% due 4/15/03.......................... 249,865
Soundview Home Equity Loan Trust, Series 2000-1,
175,000 Class A1F, 8.640% due 5/25/30........................ 176,536
-----------
TOTAL ASSET-BACKED SECURITIES
(Cost -- $567,102)................................... 566,953
-----------
COMMERCIAL MORTGAGE-BACKED SECURITIES -- 0.9%
Commercial Mortgage Asset Trust, Series 1999-C1,
75,000 Class C, 7.350% due 8/17/13.......................... 70,710
LB Commercial Conduit Mortgage Trust, Series 1999-C1,
125,000 Class A2, 6.780% due 4/15/09......................... 119,718
-----------
TOTAL COMMERCIAL MORTGAGE-BACKED SECURITIES
(Cost -- $195,333)................................... 190,428
-----------
SUB-TOTAL INVESTMENTS
(Cost -- $17,086,920)................................ 16,961,796
-----------
REPURCHASE AGREEMENT -- 20.5%
4,375,000 SBC Warburg Dillon Read Inc., 6.550% due 7/3/00;
Proceeds at maturity -- $4,377,388; (Fully
collateralized by
U.S. Treasury Bonds, 13.875% due 5/15/01; Market
value -- $4,463,250) (Cost -- $4,375,000) (c)....... 4,375,000
-----------
TOTAL INVESTMENTS -- 100%
(Cost -- $21,461,920*)............................... $21,336,796
===========
</TABLE>
------
(a) On July 3, 2000, Bell Atlantic Corp. and GTE Corp. merged. The surviving
company was renamed Verizon Communications.
(b) Non-income producing security.
(c) All or part of the security is segregated as collateral for mortgage dollar
rolls/TBAs.
(d) Mortgage Dollar Roll (See Note 9).
(e) Security is issued on a to-be-announced ("TBA") basis (See Note 8).
* Aggregate cost for Federal income tax purposes is substantially the same.
Abbreviation used in this schedule:
----------------------------------
ADR -- American Depository Receipt.
See Notes to Financial Statements.
7
<PAGE>
Statement of Assets and Liabilities
June 30, 2000 (unaudited)
<TABLE>
<S> <C>
ASSETS:
Investments, at value (Cost -- $17,086,920)....................... $16,961,796
Repurchase agreement, at value (Cost -- $4,375,000)............... 4,375,000
Cash.............................................................. 194
Dividends and interest receivable................................. 93,328
Deferred organization costs....................................... 16,450
-----------
Total Assets...................................................... 21,446,768
-----------
LIABILITIES:
Payable for securities purchased.................................. 1,689,185
Management fees payable........................................... 8,300
Administration fees payable....................................... 799
Accrued expenses.................................................. 26,768
-----------
Total Liabilities................................................. 1,725,052
-----------
Total Net Assets.................................................. $19,721,716
===========
NET ASSETS:
Par value of capital shares....................................... $ 1,870
Capital paid in excess of par value............................... 19,529,808
Undistributed net investment income............................... 439,005
Accumulated net realized loss from security transactions.......... (123,843)
Net unrealized depreciation of investments........................ (125,124)
-----------
Total Net Assets.................................................. $19,721,716
===========
Shares Outstanding................................................. 1,870,079
-----------
Net Asset Value, per share......................................... $10.55
-----------
</TABLE>
See Notes to Financial Statements.
8
<PAGE>
Statement of Operations
For the Six Months Ended June 30, 2000 (unaudited)
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest........................................................... $ 285,744
Dividends.......................................................... 244,673
Less: Foreign withholding tax...................................... (1,144)
---------
Total Investment Income............................................ 529,273
---------
EXPENSES:
Management fees (Note 2)........................................... 72,215
Shareholder communications......................................... 12,431
Audit and legal.................................................... 10,938
Shareholder and system servicing fees.............................. 6,618
Administration fees (Note 2)....................................... 4,513
Amortization of deferred organization costs........................ 3,114
Custody............................................................ 2,393
Directors' fees.................................................... 2,366
Registration fees.................................................. 1,745
Other.............................................................. 2,100
---------
Total Expenses..................................................... 118,433
Less: Management fee waiver (Note 2)............................... (28,165)
---------
Net Expenses....................................................... 90,268
---------
Net Investment Income............................................... 439,005
---------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS (NOTE 3):
Net Realized Gain From Security Transactions (excluding short-term
securities):
Proceeds from sales................................................ 3,730,626
Cost of securities sold............................................ 3,728,504
---------
Net Realized Gain.................................................. 2,122
---------
Change in Net Unrealized Depreciation of Investments:
Beginning of period................................................ (259,441)
End of period...................................................... (125,124)
---------
Decrease in Net Unrealized Depreciation............................ 134,317
---------
Net Gain on Investments............................................. 136,439
---------
Increase in Net Assets From Operations.............................. $ 575,444
=========
</TABLE>
See Notes to Financial Statements.
9
<PAGE>
Statements of Changes in Net Assets
For the Six Months Ended June 30, 2000 (unaudited)
and the Year Ended December 31, 1999
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
OPERATIONS:
Net investment income............................... $ 439,005 $ 412,045
Net realized gain (loss)............................ 2,122 (127,687)
(Increase) decrease in net unrealized depreciation.. 134,317 (388,274)
----------- -----------
Increase (Decrease) in Net Assets From Operations... 575,444 (103,916)
----------- -----------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income............................... -- (411,266)
Net realized gains.................................. -- (296)
Capital............................................. -- (13,504)
----------- -----------
Decrease in Net Assets From Distributions to
Shareholders....................................... -- (425,066)
----------- -----------
FUND SHARE TRANSACTIONS (NOTE 13):
Net proceeds from sale of shares.................... 5,624,298 15,352,257
Net asset value of shares issued for reinvestment of
dividends.......................................... -- 422,553
Cost of shares reacquired........................... (4,061,839) (3,632,987)
----------- -----------
Increase in Net Assets From Fund Share
Transactions....................................... 1,562,459 12,141,823
----------- -----------
Increase in Net Assets............................... 2,137,903 11,612,841
NET ASSETS:
Beginning of period................................. 17,583,813 5,970,972
----------- -----------
End of period*...................................... $19,721,716 $17,583,813
=========== ===========
* Includes undistributed net investment income of: .. $439,005 --
=========== ===========
</TABLE>
Statement of Cash Flows
For the Six Months Ended June 30, 2000 (unaudited)
<TABLE>
<S> <C>
CASH FLOWS USED BY OPERATING ACTIVITIES:
Purchases of long-term portfolio investments..................... $(4,509,782)
Proceeds from disposition of long-term portfolio investments and
principal paydowns.............................................. 3,857,261
Net purchases of short-term portfolio investments................ (1,248,000)
-----------
(1,900,521)
Net investment income............................................ 439,005
Amortization of net premium/discount on investments.............. (2,579)
Amortization of organization expenses............................ 3,114
Net change in receivables/payables related to operations......... 12,928
-----------
Net Cash Flows Used By Operating Activities...................... (1,448,053)
-----------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Proceeds from sale of shares..................................... 5,624,298
Cost of shares reacquired........................................ (4,145,610)
Decrease in dollar roll transactions............................. (31,390)
-----------
Net Cash Flows Provided By Financing Activities.................. 1,447,298
-----------
Net Decrease in Cash.............................................. (755)
Cash, Beginning of Period......................................... 949
-----------
Cash, End of Period............................................... $ 194
===========
</TABLE>
Statement of Cash Flows
See Notes to Financial Statements.
10
<PAGE>
Notes to Financial Statements
(unaudited)
1. Organization and Significant Accounting Policies
Salomon Brothers Variable Total Return Fund ("Fund") is a separate diversified
investment portfolio of the Salomon Brothers Variable Series Funds Inc
("Series") whose primary investment objective is to obtain above-average income
(as compared to a portfolio entirely invested in equity securities). The
Series, a Maryland corporation, is registered under the Investment Company Act
of 1940, as amended ("1940 Act"), as an open-end management investment company
and consists of this Fund and seven other investment portfolios: Salomon
Brothers Variable Capital Fund, Salomon Brothers Variable High Yield Bond Fund,
Salomon Brothers Variable Investors Fund, Salomon Brothers Variable Strategic
Bond Fund, Salomon Brothers Variable Small Cap Growth Fund, Salomon Brothers
Variable U.S. Government Income Fund and Salomon Brothers Variable Asia Growth
Fund. The U.S. Government Income Fund and Asia Growth Fund have not yet
commenced operations. The financial statements and financial highlights for the
other investment portfolios are presented in separate shareholder reports. The
Fund and each other investment portfolio of the Series is offered exclusively
for use with certain variable annuity and variable life insurance contracts
offered through the separate accounts of various life insurance companies and
qualified pension and retirement plans.
The significant accounting policies consistently followed by the Fund are: (a)
security transactions are accounted for on trade date; (b) securities traded on
national securities markets are valued at the closing prices on such markets;
securities traded in the over-the-counter market and securities for which no
sales price was reported are valued at the mean of the bid and asked prices;
debt securities are valued using either prices or estimates of market values
provided by market markers or independent pricing services; securities and
assets for which market quotations are not readily available are valued at fair
value as determined in good faith by or under the direction of the Board of
Directors of the Fund; (c) securities maturing within 60 days are valued at
cost plus accreted discount, or minus amortized premium, which approximates
market value; (d) dividend income is recorded on the ex-dividend date; (e)
interest income, adjusted for accretion of original issue and market discount,
is recorded on the accrual basis; (f) gains or losses on the sale of securities
are calculated by using the specific identification method; (g) dividends and
distributions to shareholders are recorded on the ex-dividend date; (h) the
accounting records are maintained in U.S. dollars. All assets and liabilities
denominated in foreign currencies are translated into U.S. dollars based on the
rate of exchange of such currencies against U.S. dollars on the date of
valuation. Purchases and sales of securities, and income and expenses are
translated at the rate of exchange quoted on the respective date that such
transactions are recorded. Differences between income and expense amounts
recorded and collected or paid are recorded as currency gains or losses; (i)
the character of income and gains to be distributed are determined in
accordance with income tax regulations which may differ from generally accepted
accounting principles. At December 31, 1999, reclassifications were made to the
capital accounts of the Fund to reflect permanent book/tax differences and
income and gains available for distributions under income tax regulations. Net
investment income, net realized gains and net assets were not affected by this
change; (j) the Fund intends to comply with the applicable provisions of the
Internal Revenue Code of 1986, as amended, pertaining to regulated investment
companies and to make distributions of taxable income sufficient to relieve the
Fund from substantially all Federal income and excise taxes; and (k) estimates
and assumptions are required to be made regarding assets, liabilities and
changes in net assets resulting from operations when financial statements are
prepared. Changes in the economic environment, financial markets and any other
parameters used in determining these estimates could cause actual results to
differ.
Organization costs amounting to $31,250 were incurred with the organization of
the Fund. These costs are being amortized ratably over a five year period from
commencement of operations.
2. Management Agreement and Transactions with Affiliated Persons
Salomon Brothers Asset Management Inc ("SBAM"), a wholly owned subsidiary of
Salomon Brothers Holding Company Inc., which in turn is wholly owned by Salomon
Smith Barney Holdings, Inc. ("SSBH"), acts as investment manager to the Fund.
Under the investment management agreement, the Fund pays an investment
management fee calculated at the annual rate of 0.80% of its average daily net
assets. This fee is calculated daily and paid monthly.
For the six months ended June 30, 2000, SBAM waived a portion of its management
fees amounting to $28,165.
11
<PAGE>
Notes to Financial Statements
(unaudited) (continued)
SBAM also acts as administrator to the Fund. As compensation for its services
the Fund pays SBAM a fee calculated at an annual rate of 0.05% of its average
daily net assets. This fee is calculated daily and paid monthly. SBAM has dele-
gated its responsibilities as administrator to SSB Citi Fund Management LLC
("SSBC"), an affiliate of SBAM, pursuant to a Sub-Administration Agreement be-
tween SBAM and SSBC.
CFBDS, Inc. acts as the Fund's distributor. For the six months ended June 30,
2000, Salomon Smith Barney Inc., another subsidiary of SSBH, did not receive
any brokerage commissions from the Fund.
3. Investments
During the six months ended June 30, 2000, the aggregate cost of purchases and
proceeds from sales of investments (including maturities, but excluding short-
term securities) were as follows:
<TABLE>
<S> <C>
Purchases:
U.S. government agencies & obligations.......................... $ 476,712
Other investment securities..................................... 3,431,077
-----------
$ 3,907,789
===========
Sales:
U.S. government agencies & obligations.......................... $ 178,488
Other investment securities..................................... 3,552,138
-----------
$ 3,730,626
===========
At June 30, 2000, the aggregate gross unrealized appreciation and depreciation
of investments for Federal income tax purposes were substantially as follows:
Gross unrealized appreciation..................................... $ 1,166,375
Gross unrealized depreciation..................................... (1,291,499)
-----------
Net unrealized depreciation....................................... $ (125,124)
===========
</TABLE>
4. Repurchase Agreements
The Fund purchases (and its custodian takes possession of) U.S. government se-
curities from banks and securities dealers subject to agreements to resell the
securities to the seller at a future date (generally, the next business day) at
an agreed-upon higher repurchase price. The Fund requires maintenance of the
market value of the collateral in amounts at least equal to the repurchase
price.
5. Reverse Repurchase Agreements
The Fund may enter into reverse repurchase agreements. A reverse repurchase
agreement involves a sale by the Fund of securities that it holds with an
agreement by the Fund to repurchase the same securities at an agreed upon price
and date. A reverse repurchase agreement involves risk that the market value of
the securities sold by the Fund may decline below the repurchase price of the
securities. The Fund will segregate cash or other liquid securities with re-
spect to the reverse repurchase agreements.
During the six months ended June 30, 2000, the Fund did not enter into any re-
verse repurchase agreements.
12
<PAGE>
Notes to Financial Statements
(unaudited) (continued)
6. Options Contracts
The Fund may from time to time enter into options contracts. Premiums paid when
put or call options are purchased by the Fund, represent investments, which are
marked-to-market daily. When a purchased option expires, the Fund will realize
a loss in the amount of the premium paid. When the Fund enters into a closing
sales transaction, the Fund will realize a gain or loss depending on whether
the proceeds from the closing sales transaction are greater or less than the
premium paid for the option. When the Fund exercises a put option, it will re-
alize a gain or loss from the sale of the underlying security and the proceeds
from such sale will be decreased by the premium originally paid. When the Fund
exercises a call option, the cost of the security which the Fund purchases upon
exercise will be increased by the premium originally paid.
At June 30, 2000, the Fund did not have any open purchased call or put option
contracts.
When the Fund writes a call or put option, an amount equal to the premium re-
ceived by the Fund is recorded as a liability, the value of which is marked-to-
market daily. When a written option expires, the Fund realizes a gain equal to
the amount of the premium received. When the Fund enters into a closing pur-
chase transaction, the Fund realizes a gain or loss depending upon whether the
cost of the closing transaction is greater or less than the premium originally
received, without regard to any unrealized gain or loss on the underlying secu-
rity, and the liability related to such option is eliminated. When a written
call option is exercised the proceeds of the security sold will be increased by
the premium originally received. When a written put option is exercised, the
amount of the premium originally received will reduce the cost of the security
which the Fund purchased upon exercise. When written index options are exer-
cised, settlement is made in cash.
The Fund enters into options for hedging purposes. The risk associated with
purchasing options is limited to the premium originally paid. The risk in writ-
ing a covered call option is that the Fund gives up the opportunity to partici-
pate in any increase in the price of the underlying security beyond the exer-
cise price. The risk in writing a put option is that the Fund is exposed to the
risk of loss if the market price of the underlying security declines.
During the six months ended June 30, 2000, the Fund did not write any call or
put option contracts.
7. Securities Traded on a When-Issued Basis
The Fund may from time to time purchase securities on a when-issued basis. In a
when-issued transaction, the Fund commits to purchasing securities which have
not yet been issued by the issuer. Securities purchased on a when-issued basis,
are not settled until they are delivered to the Fund. Beginning on the date the
Fund enters into the when-issued transaction, cash or other liquid securities
are segregated to cover the amount of the purchase price of the when-issued
security. These transactions are subject to market fluctuations and their
current value is determined in the same manner as for other securities.
At June 30, 2000, the Fund did not hold any when-issued securities.
8. Securities Traded on a To-Be-Announced Basis
The Fund may trade securities on a to-be-announced ("TBA") basis. In a TBA
transaction, the Fund commits to purchasing or selling securities which have
not yet been issued by the issuer, particularly the face amount and maturity
date in Government National Mortgage Association ("GNMA") transactions.
Securities purchased on a TBA basis are not settled until they are delivered to
the Fund, normally 15 to 45 days later. Beginning on the date the Fund enters
into a TBA transaction, cash or other liquid securities are segregated to cover
the amount of the TBA transaction. These transactions are subject to market
fluctuations and their current value is determined in the same manner as for
other securities.
At June 30, 2000, the Fund held TBA securities with a total cost of $1,713,049.
13
<PAGE>
Notes to Financial Statements
(unaudited) (continued)
9. Mortgage Dollar Roll Transactions
The Fund may enter into mortgage "dollar rolls" in which the Fund sells
mortgage-backed securities for delivery in the current month and simultaneously
contracts to repurchase substantially similar (same type, coupon and maturity)
securities on a specific future date. The Fund is compensated by a fee paid by
the counterparty. Dollar rolls are accounted for as financing arrangements; the
fee is accrued into interest income ratably over the term of the dollar roll
and any gain or loss on the roll is deferred until disposition of the rolled
security. The average daily balance of dollar rolls outstanding during the six
months ended June 30, 2000 was approximately $1,804,000.
10. Lending of Securities
The Fund may lend its securities to brokers, dealers and other financial
organizations. The Fund has an agreement with its custodian whereby the
custodian may lend securities owned by the Fund to brokers, dealers and other
financial organizations. Fees earned by the Fund on securities lending are
recorded in interest income. Loans of securities by the Fund are collateralized
by cash or other liquid securities that are maintained at all times in an
amount at least equal to the current market value of the loaned securities,
plus a margin which may vary depending on the type of securities loaned. The
custodian establishes and maintains the collateral in a segregated account. The
Fund maintains exposure for the risk of any losses in the investment of amounts
received as collateral.
At June 30, 2000, the Fund did not have any securities on loan.
11. Loan Participations
The Fund may invest in loans arranged through private negotiation between one
or more financial institutions. The Fund's investment in any such loan may be
in the form of a participation in or an assignment of the loan.
In connection with purchasing participations, the Fund generally will have no
right to enforce compliance by the borrower with the terms of the loan
agreement relating to the loan, nor any rights of set-off against the borrower,
and the Fund may not benefit directly from any collateral supporting the loan
in which it has purchased the participation. As a result, the Fund will assume
the credit risk of both the borrower and the lender that is selling the
participation. In the event of the insolvency of the lender selling the
participation, the Fund may be treated as a general creditor of the lender and
may not benefit from any set-off between the lender and the borrower.
At June 30, 2000, the Fund did not have any investments in loan participations.
12. Capital Loss Carryforward
At December 31, 1999, the Fund had, for Federal income tax purposes, a capital
loss carryforward of approximately $12,300, available to offset future capital
gains through December 31, 2007. To the extent that these carryforward losses
are used to offset capital gains, it is probable that the gains so offset will
not be distributed.
14
<PAGE>
Notes to Financial Statements
(unaudited) (continued)
13. Capital Stock
At June 30, 2000, the Series had 10,000,000,000 shares of capital stock autho-
rized with a par value of $0.001 per share. Each share represents an equal pro-
portionate interest and has an equal entitlement to any dividends and distribu-
tions made by the Fund.
Transactions in shares were as follows:
<TABLE>
<CAPTION>
Six Months Ended Year Ended
June 30, 2000 December 31, 1999
---------------- -----------------
<S> <C> <C>
Shares sold............. 548,712 1,449,515
Shares issued on
reinvestment of
dividends.............. -- 41,305
Shares reacquired....... (398,262) (345,070)
-------- ---------
Net Increase............ 150,450 1,145,750
======== =========
</TABLE>
15
<PAGE>
Financial Highlights
For a share of capital stock outstanding throughout each year ended December
31, except where noted:
<TABLE>
<CAPTION>
2000(1) 1999 1998(2)
------- ------- -------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period............ $ 10.23 $ 10.40 $10.00
------- ------- ------
Income (Loss) From Operations:
Net investment income (3)...................... 0.23 0.24 0.15
Net realized and unrealized gain (loss) ....... 0.09 (0.16) 0.43
------- ------- ------
Total Income From Operations................... 0.32 0.08 0.58
------- ------- ------
Less Distributions From:
Net investment income.......................... -- (0.24) (0.15)
Net realized gains............................. -- (0.00)* (0.03)
Capital ....................................... -- (0.01) --
------- ------- ------
Total Distributions............................ -- (0.25) (0.18)
------- ------- ------
Net Asset Value, End of Period.................. $ 10.55 $ 10.23 $10.40
======= ======= ======
Total Return (4)................................ 3.13%++ 0.78% 5.83%++
Net Assets, End of Period (000s)................ $19,722 $17,584 $5,971
Ratios to Average Net Assets:
Expenses (3)(5)................................ 1.00%+ 1.00% 1.00%+
Net investment income.......................... 4.86%+ 3.50% 3.57%+
Portfolio Turnover Rate......................... 22% 63% 56%
</TABLE>
------
(1) For the six months ended June 30, 2000 (unaudited).
(2) For the period from February 17, 1998 (commencement of operations) through
December 31, 1998.
(3) SBAM has waived all or a part of its management fees for the six months
ended June 30, 2000, the year ended December 31, 1999 and the period ended
December 31, 1998. In addition, SBAM has reimbursed the Fund for $26,591 of
expenses for the period ended December 31, 1998. If such fees were not
waived or expenses not reimbursed, the per share decrease in net investment
income and the actual expense ratio would have been as follows:
<TABLE>
<CAPTION>
Expense Ratio Without
Net Investment Income Fee Waiver and/or
Per Share Decreases Expense Reimbursement
--------------------- ---------------------
<S> <C> <C>
2000.......................... $0.01 1.31%+
1999.......................... 0.05 1.65
1998.......................... 0.08 2.90+
</TABLE>
(4) Total returns do not reflect expenses associated with the separate account
such as administrative fees, account charges and surrender charges which,
if reflected, would reduce the total returns for all periods shown. Total
returns may also reflect a voluntary expense cap imposed by Salomon Broth-
ers Asset Management Inc to limit total Fund operating expenses. Absent
this expense cap, total returns for the Fund would be lower. Expense caps
may be revised or terminated.
(5) As a result of a voluntary expense limitation, expense ratios will not ex-
ceed 1.00%.
* Amount represents less than $0.01 per share.
++Total return is not annualized, as it may not be representative of the total
return for the year.
+ Annualized.
16
<PAGE>
Salomon Brothers Variable Series Funds Inc
INVESTMENT MANAGER
Salomon Brothers Asset Management Inc
7 World Trade Center
New York, New York 10048
CUSTODIAN
PFPC Trust Company
17th and Chestnut Streets
Philadelphia, Pennsylvania 19103
LEGAL COUNSEL
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, New York 10017
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
Directors
CHARLES F. B ARBER
Consultant; formerly Chairman;
ASARCO Incorporated
CAROL L. C OLMAN
Consultant, Colman Consulting
DANIEL P. CRONIN
Vice President-General Counsel,
Pfizer International Inc.
HEATH B. MCLENDON
Chairman and President;
Managing Director, Salomon Smith Barney Inc.
President and Director, SSB Citi Fund Management LLC
and Travelers Investment Advisers, Inc.
Officers
HEATH B. MCLENDON
Chairman and President
LEWIS E. DAIDONE
Executive Vice President and Treasurer
ROSS S. MARGOLIES
Executive Vice President
BETH A. SEMMEL
Executive Vice President
PETER J. WILBY
Executive Vice President
GEORGE J. WILLIAMSON
Executive Vice President
JOHN B. CUNNINGHAM
Vice President
ANTHONY PACE
Controller
CHRISTINA T. SYDOR
Secretary
<PAGE>
===================
Salomon Brothers
=====================
Asset Management
SEVEN WORLD TRADE CENTER . NEW YORK, NEW YORK 10048
<PAGE>
SALOMON BROTHERS
Variable Series Funds Inc
Semi-
Annual
Report
2000
June 30,2000
. High Yield Bond Fund
[LOGO]
<PAGE>
[LOGO]
SALOMON BROTHERS VARIABLE SERIES FUNDS INC
Our Message to You
DEAR SHAREHOLDER:
We are pleased to provide you with the semi-annual report for the Salomon
Brothers Variable High Yield Bond Fund ("Fund") for the period ended June 30,
2000. This letter will briefly discuss general economic and market conditions as
well as Fund developments during the reporting period.1 A detailed summary of
performance and current Fund holdings can be found in the appropriate sections
that follow. We hope you find this report useful and informative.
INVESTMENT STRATEGY AND PORTFOLIO UPDATE
The Fund's primary objective is to maximize current income, with capital
appreciation as a secondary objective. The Fund seeks to achieve its objectives
by investing primarily in a diversified portfolio of high-yield fixed-income
securities rated in the medium or lower rating categories or those securities
determined by the manager to be of comparable quality. For the six months ended
June 30, 2000, the Fund returned a negative 0.54% versus a negative 1.42% return
for the Salomon Smith Barney High Yield Market Index2 over the same period.
MARKET OVERVIEW
For the six months ended June 30, 2000, the high-yield bond market returned
negative 1.42% as reported by the Salomon Smith Barney High Yield Market Index.
Interest rate and inflation concerns were serious issues for the high-yield bond
market throughout the period.
As the Federal Reserve Board ("Fed") hiked interest rates by 25 basis points3 in
February and the tech-laden Nasdaq Composite Index4 turned in a relatively
strong performance early in calendar year 2000, a string of mutual fund outflows
ensued as investors fled the interest rate-sensitive bond markets for the strong
stock markets. As the U.S. stock markets became more volatile in March and April
and the Fed announced a 50 basis point interest rate increase with a tightening
bias on May 16, 2000, mutual fund outflows intensified as investors focused on
the potential for further interest rate increases. Investors also increasingly
considered the possibility of a cyclical downturn in the near term, which would
exacerbate already high default rates.
-------------------
1 The information provided represents the opinion of the manager and is not
intended to be a forecast of future results. Further, there is no assurance
that certain securities will remain in or out of the portfolio.
2 The Salomon Smith Barney High Yield Market Index covers a significant
portion of the below-investment-grade U.S. corporate bond market. An
investor cannot invest directly in an index.
3 A basis point is 0.01% or one one-hundredth of a percent.
4 The Nasdaq Composite Index is a market value-weighted index that measures
all domestic and non-U.S. based securities listed on the NASDAQ stock
market. An investor cannot invest directly in an index.
1
<PAGE>
As a result, mutual fund outflows for the period totaled about $5.9 billion. In
June, however, benign economic data and a more passive Fed mitigated interest
rate concerns while the high absolute yields available in the high-yield bond
market attracted investors from the volatile equity markets. As a result, the
high-yield bond market saw in June its first month of positive mutual fund flows
in 2000 and returned 2.25% for the month, according to the Salomon Smith Barney
High Yield Market Index.
For the six months ended June 30, 2000, the top performing sectors in the
high-yield market included telecommunications, energy, technology, utilities and
gaming. Telecommunications performance was driven by explosive industry growth,
continued mergers and acquisitions and stock investment activity. High product
prices supported positive performance in energy. Technology's performance
benefited from good fourth quarter 1999 results and the popularity of the sector
in the stock markets early in the period. Utilities and gaming, which are
generally composed of higher rated issuers, benefited from investors' preference
for higher-quality issues.
The most significant underperforming sectors consisted of automotive,
steel/metals, capital goods, leisure/lodging, supermarkets/drugstores and
services/other. Automotive was adversely affected by weakness in the parts
aftermarket. Steel/metal's performance was hurt by product price weakness.
Additionally, automotive, steel/metals and capital goods were negatively
impacted by increased cyclical concerns. Leisure/lodging was adversely affected
by operating difficulties at several issuers resulting from overcapacity in the
theatre operator sector. Supermarkets/drugstores performance was adversely
affected by difficulties at Rite Aid and Pathmark.
In terms of credit quality, BB issues outperformed B issues, which in turn
outperformed CCC issues as investors continued to favor the greater liquidity
and higher credit quality offered by BB issues. BB, B and CCC issues returned
0.28%, negative 2.01% and negative 3.92%, respectively.
The Fund benefited from overweightings in energy and gaming. It was also helped
by an underweighting in supermarkets/drugstores. Performance was hurt, however,
by overweightings in steel/metals and capital goods and underweightings in
telecommunications, technology and utilities. During the course of the period,
the Fund responded to market conditions by increasing its positions in energy
and gaming and reducing its positions in steel/metals and leisure/lodging.
2
<PAGE>
On June 30, 2000, the high-yield bond market, as measured by the Salomon Smith
Barney High Yield Market Index, yielded 12.52%, up from 11.41% at year-end 1999.
The excess yield over Treasuries was 6.40%, up from 5.00% at 1999 year-end. We
believe that these levels represent attractive long-term value. (Please note
that past performance is not indicative of future results. Additionally, index
returns are not representative of the Fund's yield.)
Going forward, we expect the high-yield market to continue to experience
volatility over the course of the year primarily as a result of several
technical factors, including:
. mutual fund flows;
. decreased Collateralized Bond Obligations ("CBO") demand;
. reduced secondary market liquidity; and
. continuing cyclical concerns.
In light of these conditions, we are pursuing a conservative investment strategy
geared to overweighting BB credits and aggressively pursuing selective
opportunities in undervalued B and CCC credits.
Thank you for your investment in the Salomon Brothers Variable High Yield Bond
Fund. We look forward to helping you pursue your financial goals in the new
century.
Cordially,
/s/Heath B. McLendon /s/Peter J. Wilby
Heath B. McLendon Peter J. Wilby
Chairman and President Executive Vice President
July 15, 2000
3
<PAGE>
The following graph depicts the performance of the High Yield Bond Fund versus
the Salomon Smith Barney High Yield Market Index. It is important to note that
the Fund is a professionally managed mutual fund while the index is not
available for investment and is unmanaged. The comparison is shown for
illustrative purposes only.
HISTORICAL PERFORMANCE (unaudited)
SALOMON BROTHERS VARIABLE HIGH YIELD BOND FUND Comparison of $10,000 Investment
in the Fund with Salomon Smith Barney High Yield Market Index
Salomon Brothers High-
High Yield Bond Fund Yield Market Index
5/1/98 10,000 10,000
Jun-98 10,080 10,049
Dec-98 10,014 9,902
Jun-99 10,338 10,078
Dec-99 10,567 9,775
6/30/00 10,509 9,637
Past performance is not predictive of future performance. The graph does not
reflect expenses associated with the separate account such as administrative
fees, account charges and surrender charges which, if reflected, would reduce
the performance shown.
<TABLE>
<CAPTION>
Net Asset Value
------------------------
Beginning End Income Capital Gain Return Total
Period Ended of Period of Period Dividend Distribution of Capital Returns+
=================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
6/30/00 $ 9.22 $9.17 $0.00 $0.00 $0.00 (0.54)%++
---------------------------------------------------------------------------------------------------------------------------------
12/31/99 9.58 9.22 0.88 0.00 0.01 5.56
---------------------------------------------------------------------------------------------------------------------------------
Inception*-- 12/31/98 10.00 9.58 0.43 0.00 0.00 0.14++
=================================================================================================================================
$1.31 $0.00 $0.01
=================================================================================================================================
Average Annual Total Returns+
Six Months Ended 6/30/00++ (0.54)%
---------------------------------------------------------------------------------------------------------------------------------
Year Ended 6/30/00 1.66
---------------------------------------------------------------------------------------------------------------------------------
Inception* through 6/30/00 2.32
=================================================================================================================================
Cumulative Total Return+
Inception* through 6/30/00 5.09%%
=================================================================================================================================
</TABLE>
+ Assumes the reinvestment of all dividends and capital gains distributions
at net asset value. Total returns do not reflect expenses associated with
the separate account such as administrative fees, account charges and
surrender charges which, if reflected, would reduce the total returns for
all periods shown. Total returns may also reflect a voluntary expense cap
imposed by Salomon Brothers Asset Management Inc to limit total Fund
operating expenses. Absent this expense cap, total returns for the Fund
would be lower. Expense caps may be revised or terminated.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
* Inception date is May 1, 1998.
4
<PAGE>
Schedule of Investments
June 30, 2000 (unaudited)
<TABLE>
<CAPTION>
Face
Amount Security Value
<C> <S> <C>
-------------------------------------------------------------------------------
CORPORATE BONDS -- 63.7%
Basic Industries -- 5.2%
$ 40,000 AK Steel Corp., Company Guaranteed, 7.875% due 2/15/09.. $ 35,700
Glencore Nickel Property Ltd., Company Guaranteed,
125,000 9.000% due 12/1/14...................................... 104,375
Lyondell Chemical Co., Series B, Secured Notes, 9.875%
125,000 due 5/1/07.............................................. 123,750
50,000 Owens-Illinois Inc., Debentures, 7.500% due 5/15/10..... 42,938
P&L Coal Holdings Corp., Series B, Sr. Sub. Notes,
25,000 9.625% due 5/15/08...................................... 23,313
25,000 Radnor Holdings Inc., Sr. Notes, 10.000% due 12/1/03.... 22,500
Tembec Industries Inc., Company Guaranteed, 8.625% due
50,000 6/30/09................................................. 48,250
ZSC Specialty Chemicals PLC, Company Guaranteed.,
50,000 11.000% due 7/1/09...................................... 49,250
----------
450,076
----------
Consumer Cyclicals -- 3.9%
Cole National Group, Inc., Sr. Sub. Notes, 8.625% due
25,000 8/15/07................................................. 16,625
HMH Properties Inc., Series B, Sr. Notes, 7.875% due
125,000 8/1/08.................................................. 112,813
125,000 Leslie's Poolmart, Sr. Notes, 10.375% due 7/15/04....... 93,750
25,000 Levi Strauss & Co., 7.000% due 11/1/06.................. 19,125
Pillowtex Corp., Series B, Sr. Sub. Notes, 9.000% due
75,000 12/15/07................................................ 26,250
50,000 Tenet Healthcare Corp., Sr. Notes, 8.000% due 1/15/05... 48,250
Vlasic Foods International Inc., Series B, Sr. Sub.
50,000 Notes, 10.250% due 7/1/09............................... 17,750
----------
334,563
----------
Consumer Non-Cyclicals -- 11.7%
American Safety Razor Corp., Series B, Sr. Notes, 9.875%
50,000 due 8/1/05.............................................. 48,250
50,000 Columbia Healthcare Co., 6.910% due 6/15/05............. 45,750
125,000 Delta Beverage Group, Sr. Notes, 9.750% due 12/15/03.... 118,594
50,000 Derby Cycle Corp., Sr. Notes, 10.000% due 5/15/08....... 20,250
French Fragrance Inc., Series D, Company Guaranteed,
50,000 10.375% due 5/15/07..................................... 47,250
Fresenius Medical Care Capital Trust II, Company
50,000 Guaranteed, 7.875% due 2/1/08........................... 44,625
Harrah's Operating Co., Inc., Company Guaranteed, 7.875%
50,000 due 12/15/05............................................ 47,125
Home Interiors & Gifts Inc., Company Guaranteed, 10.125%
50,000 due 6/1/08.............................................. 28,750
Horseshoe Gaming LLC, Series B, Sr. Sub. Notes, 9.375%
125,000 due 6/15/07............................................. 123,750
Imperial Holly Corp., Sr. Sub. Notes, 9.750% due
125,000 12/15/07................................................ 24,531
50,000 MGM Grand Inc., Company Guaranteed, 9.750% due 6/1/07... 51,125
Mohegan Tribal Gaming, Sr. Sub. Notes, 8.750% due
50,000 1/1/09.................................................. 47,750
North Atlantic Trading Co., Series B, Company
50,000 Guaranteed, 11.000% due 6/15/04......................... 45,375
Park Place Entertainment Corp., Sr. Sub. Notes, 7.875%
125,000 due 12/15/05............................................ 117,813
Revlon Consumer Products Corp.:
25,000 Sr. Notes, 9.000% due 11/1/06........................... 18,125
10,000 Sr. Sub. Notes, 8.625% due 2/1/08....................... 5,100
Station Casinos Inc., Sr. Sub. Notes, 9.875% due 7/1/10
50,000 (a)..................................................... 50,375
Sun International Hotels Ltd., Sub. Debentures, 9.000%
90,000 due 3/15/07............................................. 83,700
50,000 WestPoint Stevens, Inc., Sr. Notes, 7.875% due 6/15/05.. 42,000
----------
1,010,238
----------
Energy -- 5.7%
Belco Oil & Gas Corp., Series B, Sr. Sub. Notes, 8.875%
50,000 due 9/15/07............................................. 46,500
Canadian Forest Oil Ltd., Sr. Sub. Notes, 8.750% due
100,000 9/15/07................................................. 94,500
100,000 Clark R&M Inc., Sr. Sub. Notes, 8.875% due 11/15/07..... 64,500
Gulf Canada Resources Ltd., Sub. Debentures, 9.625% due
50,000 7/1/05.................................................. 51,125
Key Energy Services Inc., Series B, Sr. Sub. Notes,
50,000 14.000% due 1/15/09..................................... 56,500
Ocean Energy Inc., Series B, Sr. Sub Notes, 8.875% due
50,000 7/15/07................................................. 50,000
Pioneer Natural Resources N.L., Company Guaranteed,
25,000 9.625% due 4/1/10....................................... 25,844
Plains Resources Inc., Company Guaranteed, 10.250% due
50,000 3/15/06 (a)............................................. 50,625
Vintage Petroleum, Inc., Sr. Sub. Notes, 9.750% due
50,000 6/30/09................................................. 51,125
----------
490,719
----------
</TABLE>
See Notes to Financial Statements.
5
<PAGE>
Schedule of Investments
June 30, 2000 (unaudited) (continued)
<TABLE>
<CAPTION>
Face
Amount Security Value
<C> <S> <C>
-------------------------------------------------------------------------------
Financial Services -- 1.9%
Airplanes Pass Through Trust, Class D, Company
$123,463 Guaranteed, 10.875% due 3/15/19......................... $ 100,300
ContiFinancial Corp., Sr. Notes:
50,000 7.500% due 3/15/02 (b).................................. 6,250
75,000 8.125% due 4/1/08 (b)................................... 9,375
50,000 Forest City Enterprises, Sr. Notes, 8.500% due 3/15/08.. 45,500
----------
161,425
----------
Housing Related -- 1.4%
American Standard Inc., Company Guaranteed, 7.375% due
125,000 4/15/05................................................. 117,656
----------
Manufacturing -- 9.6%
Anchor Advanced Products, Inc., Sr. Notes, 11.750% due
50,000 4/1/04.................................................. 33,750
Breed Technologies, Inc., Sr. Sub. Notes, 9.250% due
100,000 4/15/08 (b)(c).......................................... 1,125
Federal-Mogul Corp., Company Guaranteed, 7.500% due
250,000 1/15/09................................................. 171,563
50,000 Hexcel Corp., Sr. Sub. Notes, 9.750% due 1/15/09........ 44,750
High Voltage Engineering Corp., Sr. Notes, 10.500% due
75,000 8/15/04................................................. 52,125
Hines Horticulture Inc., Series B, Sr. Sub. Notes,
125,000 11.750% due 10/15/05.................................... 125,625
Indesco International Inc., Sr. Sub. Notes, 9.750% due
125,000 4/15/08................................................. 46,875
Jordan Industries, Inc., Series D, Sr. Notes, 10.375%
50,000 due 8/1/07.............................................. 46,000
Motors & Gears, Inc., Series D, Sr. Notes, 10.750% due
125,000 11/15/06................................................ 120,938
Polymer Group, Inc., Series B, Sr. Sub. Notes, 8.750%
50,000 due 3/1/08.............................................. 41,750
125,000 Sequa Corp., Sr. Notes, 9.000% due 8/1/09............... 120,625
Tenneco Automotive Inc., Series B, Company Guaranteed,
25,000 11.625% due 10/15/09.................................... 22,375
----------
827,501
----------
Media & Telecommunications -- 17.0%
50,000 Adelphia Communications Corp., Series B, Sr. Notes,
9.875% due 3/1/07....................................... 48,000
20,000 Centennial Cellular Operations Co., Sr. Sub. Notes,
10.750% due 12/15/08.................................... 19,525
75,000 Century Communications Corp., Series B, Sr. Discount
Notes, zero coupon due 1/15/08.......................... 31,125
100,000 Charter Communications Holdings LLC., Sr. Notes, 8.625%
due 4/1/09.............................................. 88,375
125,000 CSC Holdings Inc., Sr. Debentures, 7.625% due 7/15/18... 112,344
50,000 Global Crossing Holding Ltd., Company Guaranteed, 9.125%
due 11/15/06............................................ 48,125
125,000 Hollinger International Publishing, Sr. Sub. Notes,
9.250% due 2/1/06....................................... 123,906
50,000 ICG Holdings Inc., Company Guaranteed, 12.500% due
5/1/06.................................................. 41,625
50,000 Intermedia Communications Inc., Series B, Sr. Notes,
8.600% due 6/1/08....................................... 46,500
50,000 Level 3 Communications Inc., Sr. Notes, 9.125% due
5/1/08.................................................. 45,125
200,000 Nextel Communications, Inc., Sr. Serial Redeemable
Discount Notes, zero coupon until 2/15/03,
9.950% thereafter, due 2/15/08........................ 147,500
50,000 NEXTLINK Communications, Inc., Sr. Notes, 10.750% due
6/1/09.................................................. 49,500
150,000 NTL Inc., Series B, Sr. Notes, zero coupon until 4/1/03,
9.750% thereafter, due 4/1/08........................... 94,125
15,000 PSINet Inc., Sr. Notes, 11.000% due 8/1/09.............. 13,950
50,000 Price Communications Wireless, Inc., Series B, Company
Guaranteed, 9.125% due 12/15/06......................... 50,750
50,000 Rogers Cantel, Inc., Debentures, 9.375% due 6/1/08...... 51,750
125,000 Rogers Communications Inc., Sr. Notes, 8.875% due
7/15/07................................................. 123,125
125,000 Telewest Communication PLC, Sr. Discount Notes, zero
coupon until 4/15/04, 9.250% thereafter, due 4/15/09.. 67,813
200,000 United International Holdings Inc., Series B, Sr.
Secured Discount Notes, zero coupon until 2/15/03,
10.750% thereafter, due 2/15/08....................... 141,000
125,000 World Color Press Inc., Sr. Sub. Notes, 8.375% due
11/15/08................................................ 120,937
----------
1,465,100
----------
</TABLE>
See Notes to Financial Statements.
6
<PAGE>
Schedule of Investments
June 30, 2000 (unaudited) (continued)
<TABLE>
<CAPTION>
Face
Amount Security Value
<C> <S> <C>
-------------------------------------------------------------------------------
Services/Other -- 3.7%
Allied Waste Industries North America Inc., Sr. Sub.
$ 50,000 Notes, 10.000% due 8/1/09................................ $ 42,000
25,000 Aqua Chemical Inc., Sr. Sub. Notes, 11.250% due 7/1/08... 14,187
Avis Rent A Car, Inc., Sr. Sub. Notes, 11.000% due
125,000 5/1/09................................................... 130,938
Crown Castle International Corp., Sr. Notes, 10.750% due
25,000 8/1/11................................................... 25,469
50,000 Insight Midwest, Sr. Notes, 9.750% due 10/1/09........... 49,250
50,000 Iron Mountain Inc., Sr. Sub. Notes, 8.750% due 9/30/09... 46,250
125,000 Safety-Kleen Corp., Sr. Sub. Notes, 9.250% due 6/1/08.... 10,625
---------
318,719
---------
Technology -- 0.6%
50,000 Polaroid Corp., Sr. Notes, 11.500% due 2/15/06........... 52,250
---------
Transportation -- 1.9%
Enterprise Shipholding Inc., Sr. Notes, 8.875% due
125,000 5/1/08................................................... 70,625
Northwest Airlines Inc., Company Guaranteed, 7.625% due
50,000 3/15/05.................................................. 44,250
50,000 Stena AB, Sr. Notes, 8.750% due 6/15/07.................. 43,875
---------
158,750
---------
Utilities -- 1.1%
50,000 Azurix Corp., Sr. Notes, 10.750% due 2/15/10 (a)......... 48,375
50,000 Calpine Corp., Sr. Notes, 7.750% due 4/15/09............. 47,375
---------
95,750
---------
TOTAL CORPORATE BONDS
(Cost -- $6,475,914)..................................... 5,482,747
---------
SOVEREIGN BONDS -- 26.9%
Argentina -- 4.7%
Republic of Argentina:
125,000 11.750% due 4/7/09....................................... 116,469
35,000 11.375% due 3/15/10...................................... 31,937
149,000 11.750% due 6/15/15...................................... 135,217
85,000 12.125% due 2/25/19...................................... 80,325
40,000 12.000% due 2/1/20....................................... 36,700
---------
400,648
---------
Brazil -- 5.6%
Federal Republic of Brazil:
176,000 14.500% due 10/15/09..................................... 186,428
30,000 12.250% due 3/6/30....................................... 27,450
54,182 C Bonds, 8.000% due 4/15/14.............................. 39,316
140,000 DCB, Series L, 7.000% due 4/15/12 (d).................... 103,425
85,000 Discount Bonds, Series Z-L, 6.937% due 4/15/24 (d)....... 67,256
75,000 FLIRB, 7.375% due 4/15/09 (d)............................ 58,125
---------
482,000
---------
Bulgaria -- 1.1%
Republic of Bulgaria, Discount Bonds, Series A, 7.0625%
125,000 due 7/28/24 (d).......................................... 98,750
---------
Columbia -- 1.1%
Republic of Columbia:
95,000 9.750% due 4/23/09....................................... 74,812
15,000 8.375% due 2/15/27....................................... 9,562
20,000 FRN, 8.700% due 2/15/16 (d).............................. 13,100
---------
97,474
---------
</TABLE>
See Notes to Financial Statements.
7
<PAGE>
Schedule of Investments
June 30, 2000 (unaudited) (continued)
<TABLE>
<CAPTION>
Face
Amount Security Value
<C> <S> <C>
-------------------------------------------------------------------------------
Croatia -- 0.5%
Republic of Croatia, FRB, Series A, 7.0625% due 7/31/10
$ 42,955 (d)..................................................... $ 39,303
----------
Ecuador -- 0.4%
110,000 Republic of Ecuador, Par Bonds, due 2/28/25 (b)......... 37,400
----------
Ivory Coast -- 0.2%
125,000 Republic of Ivory Coast, FLIRB, due 3/29/18 (b)......... 20,000
----------
Mexico -- 2.7%
200,000 United Mexican States, 11.375% due 9/15/16.............. 229,200
----------
Panama -- 1.5%
Republic of Panama:
75,000 8.875% due 9/30/27...................................... 63,281
83,167 PDI Bonds, 7.0625% due 7/17/16 (d)(e)................... 68,717
----------
131,998
----------
Peru -- 0.5%
75,000 Republic of Peru, FLIRB 3.750% due 3/7/17 (d)........... 45,422
----------
Phillipines -- 0.6%
60,000 Republic of the Philippines, 9.875% due 1/15/19......... 49,200
----------
Poland -- 0.4%
Republic of Poland, RSTA Bonds, 4.000% due 10/27/24
50,000 (d)..................................................... 30,094
----------
Russia -- 3.8%
Russian Government:
30,000 11.750% due 6/10/03..................................... 27,881
160,000 12.750% due 6/24/28..................................... 139,000
525,000 IAN due 12/15/15 (b)(c)................................. 163,078
----------
329,959
----------
Venezuela -- 3.8%
Republic of Venezuela:
125,000 13.625% due 8/15/18..................................... 116,250
115,000 9.250% due 9/15/27...................................... 75,871
166,665 FLIRB Series A, 7.4375% due 3/31/07 (d)................. 136,665
----------
328,786
----------
TOTAL SOVEREIGN BONDS
(Cost -- $2,172,300).................................... 2,320,234
----------
LOAN PARTICIPATIONS -- 2.8%
Algeria -- 1.2%
The People's Democratic Republic of Algeria, Tranche 1,
125,000 7.875% due 9/4/06 (Chase Manhattan) (d)(f).............. 102,969
----------
Morocco -- 1.0%
Kingdom of Morocco, Tranche A, 7.750% due 1/1/09 (Chase
90,000 Manhattan) (b)(c)(f).................................... 81,000
----------
Russia -- 0.6%
Russian Government, Principal Loan due 12/15/20 (J.P.
175,000 Morgan) (b)(c).......................................... 53,812
----------
TOTAL LOAN PARTICIPATIONS
(Cost -- $171,107)...................................... 237,781
----------
</TABLE>
See Notes to Financial Statements.
8
<PAGE>
Schedule of Investments
June 30, 2000 (unaudited) (continued)
<TABLE>
<CAPTION>
Share Security Value
<C> <S> <C>
-------------------------------------------------------------------------------
PREFERRED STOCK (c) -- 0.0%
TCR Holding Corp.:
219 Class B Shares.......................................... $ 2
121 Class C Shares.......................................... 1
318 Class D Shares.......................................... 3
658 Class E Shares.......................................... 7
----------
TOTAL PREFERRED STOCK
(Cost -- $78)........................................... 13
----------
<CAPTION>
Face
Amount
--------
<C> <S> <C>
REPURCHASE AGREEMENT -- 6.6%
$571,000 SBC Warburg Dillon Read Inc., 6.550% due 7/3/00;
Proceeds at maturity -- $571,312; (Fully collateralized
by U.S.
Treasury Bonds, 5.500% due 8/15/28; Market value --
$582,964) (Cost -- $571,000)........................... 571,000
----------
TOTAL INVESTMENTS -- 100%
(Cost -- $9,390,399*)................................... $8,611,775
==========
</TABLE>
------
(a) Security is exempt from registration under Rule 144A of the Securities Act
of 1933. This security may be resold in transactions that are exempt from
registration, normally to qualified institutional buyers.
(b) Security is currently in default.
(c) Non-income producing securities.
(d) Rate shown reflects rate in effect at June 30, 2000 on instrument with
variable rates or step coupon rates.
(e) Payment-in-kind security for which all or part of the interest earned is
capitalized as additional principal.
(f) Participation interests were acquired through the financial institutions
indicated parenthetically.
* Aggregate cost for Federal income tax purposes is substantially the same.
Abbreviations used in this schedule:
DCB-- Debt Conversion Bonds.
FLIRB-- Front-Loaded Interest Reduction Bonds.
FRB-- Floating Rate Bonds.
FRN-- Floating Rate Notes.
IAN-- Interest Arrears Notes.
PDI-- Past-Due Interest.
RSTA-- Revolving Short Term Agreement.
See Notes to Financial Statements.
9
<PAGE>
Statement of Assets and Liabilities
June 30, 2000 (unaudited)
<TABLE>
<S> <C>
ASSETS:
Investments, at value (Cost -- $9,390,399)......................... $8,611,775
Cash............................................................... 239
Interest receivable................................................ 228,494
----------
Total Assets....................................................... 8,840,508
----------
LIABILITIES:
Payable for securities purchased................................... 49,803
Administration fees payable........................................ 351
Advisory fees payable.............................................. 1,272
Accrued expenses................................................... 24,961
----------
Total Liabilities.................................................. 76,387
----------
Total Net Assets.................................................... $8,764,121
==========
NET ASSETS:
Par value of capital shares........................................ $ 955
Capital paid in excess of par value................................ 9,431,678
Undistributed net investment income................................ 387,370
Accumulated net realized loss from security transactions........... (277,258)
Net unrealized depreciation of investments......................... (778,624)
----------
Total Net Assets.................................................... $8,764,121
==========
Shares Outstanding.................................................. 955,288
----------
Net Asset Value, per share.......................................... $9.17
----------
</TABLE>
See Notes to Financial Statements.
10
<PAGE>
Statement of Operations
For the Six Months Ended June 30, 2000 (unaudited)
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest........................................................... $ 427,777
---------
EXPENSES:
Management fees (Note 2)........................................... 30,305
Audit and legal.................................................... 10,938
Shareholder communications......................................... 9,601
Shareholder and system servicing fees.............................. 6,401
Directors' fees.................................................... 2,366
Administration fees (Note 2)....................................... 2,020
Custody............................................................ 1,192
Registration fees.................................................. 994
Other.............................................................. 1,728
---------
Total Expenses..................................................... 65,545
Less: Management fee waiver (Note 2)............................... (25,138)
---------
Net Expenses....................................................... 40,407
---------
Net Investment Income............................................... 387,370
---------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND OPTIONS
(NOTES 3 AND 6):
Net Realized Gain (Loss) From:
Security transactions (excluding short-term securities)............ 31,700
Options purchased.................................................. (20,856)
---------
Net Realized Gain.................................................. 10,844
---------
Increase in Net Unrealized Depreciation of Investments:
Beginning of period................................................ (339,440)
End of period...................................................... (778,624)
---------
Increase in Net Unrealized Depreciation............................ (439,184)
---------
Net Loss on Investments and Options................................. (428,340)
---------
Decrease in Net Assets From Operations.............................. $ (40,970)
=========
</TABLE>
See Notes to Financial Statements.
11
<PAGE>
Statements of Changes in Net Assets
For the Six Months Ended June 30, 2000 (unaudited)
and the Year Ended December 31, 1999
<TABLE>
<CAPTION>
2000 1999
OPERATIONS: ---------- ----------
<S> <C> <C>
Net investment income................................. $ 387,370 $ 703,830
Net realized gain (loss).............................. 10,844 (227,303)
Increase in net unrealized depreciation............... (439,184) (63,876)
---------- ----------
Increase (Decrease) in Net Assets From Operations..... (40,970) 412,651
---------- ----------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income................................. -- (703,830)
Capital............................................... -- (6,198)
---------- ----------
Decrease in Net Assets From Distributions to
Shareholders......................................... -- (710,028)
---------- ----------
FUND SHARE TRANSACTIONS (NOTE 12):
Net proceeds from sale of shares...................... 3,083,944 4,847,107
Net asset value of shares issued for reinvestment of
dividends............................................ -- 572,293
Cost of shares reacquired............................. (2,218,753) (4,131,224)
---------- ----------
Increase in Net Assets From Fund Share Transactions... 865,191 1,288,176
---------- ----------
Increase in Net Assets................................. 824,221 990,799
NET ASSETS:
Beginning of period................................... 7,939,900 6,949,101
---------- ----------
End of period*........................................ $8,764,121 $7,939,900
========== ==========
------
* Includes undistributed net investment income of:..... $387,370 --
========== ==========
</TABLE>
See Notes to Financial Statements.
12
<PAGE>
Notes to Financial Statements
(unaudited)
1. Organization and Significant Accounting Policies
Salomon Brothers Variable High Yield Bond Fund ("Fund") is a separate
diversified investment portfolio of the Salomon Brothers Variable Series Funds
Inc ("Series") whose primary investment objective is to maximize current income
and secondarily to seek capital appreciation. The Series, a Maryland
corporation, is registered under the Investment Company Act of 1940, as amended
("1940 Act"), as an open-end management investment company and consists of this
Fund and seven other investment portfolios: Salomon Brothers Variable Capital
Fund, Salomon Brothers Variable Small Cap Growth Fund, Salomon Brothers
Variable Total Return Fund, Salomon Brothers Variable Investors Fund, Salomon
Brothers Variable Strategic Bond Fund, Salomon Brothers Variable U.S.
Government Income Fund and Salomon Brothers Variable Asia Growth Fund. The U.S.
Government Income Fund and Asia Growth Fund have not yet commenced operations.
The financial statements and financial highlights for the other investment
portfolios are presented in separate shareholder reports. The Fund and each
other investment portfolio of the Series is offered exclusively for use with
certain variable annuity and variable life insurance contracts offered through
the separate accounts of various life insurance companies and qualified pension
and retirement plans.
The significant accounting policies consistently followed by the Fund are: (a)
security transactions are accounted for on trade date; (b) securities traded on
national securities markets are valued at the closing prices on such markets;
securities traded in the over-the-counter market and securities for which no
sales price was reported are valued at the mean of the current bid and asked
prices; debt securities are valued using either prices or estimates of market
values provided by market makers or independent pricing services; securities
and assets for which market quotations are not readily available are valued at
fair value as determined in good faith by or under the direction of the Board
of Directors of the Fund; (c) securities maturing within 60 days are valued at
cost plus accreted discount, or minus amortized premium, which approximates
market value; (d) dividend income is recorded on the ex-dividend date; (e)
interest income, adjusted for accretion of original issue or market discount,
is recorded on the accrual basis; (f) gains or losses on the sale of securities
are calculated by using the specific identification method; (g) dividends and
distributions to shareholders are recorded on the ex-dividend date; (h) the
accounting records are maintained in U.S. dollars. All assets and liabilities
denominated in foreign currencies are translated into U.S. dollars based on the
rate of exchange of such currencies against U.S. dollars on the date of
valuation. Purchases and sales of securities, and income and expenses are
translated at the rate of exchange quoted on the respective date that such
transactions are recorded. Differences between income and expense amounts
recorded and collected or paid are recorded as currency gains or losses; (i)
the character of income and gains to be distributed are determined in
accordance with income tax regulations which may differ from generally accepted
accounting principles; (j) the Fund intends to comply with the applicable
provisions of the Internal Revenue Code of 1986, as amended, pertaining to
regulated investment companies and to make distributions of taxable income
sufficient to relieve the Fund from substantially all Federal income and excise
taxes; and (k) estimates and assumptions are required to be made regarding
assets, liabilities and changes in net assets resulting from operations when
financial statements are prepared. Changes in the economic environment,
financial markets and any other parameters used in determining these estimates
could cause actual results to differ.
2. Management Agreement and Transactions with Affiliated Persons
Salomon Brothers Asset Management Inc ("SBAM"), a wholly owned subsidiary of
Salomon Brothers Holding Company Inc., which, in turn, is wholly owned by Salo-
mon Smith Barney Holdings, Inc. ("SSBH"), acts as investment manager to the
Fund. Under the investment management agreement, the Fund pays an investment
management fee calculated at the annual rate of 0.75% of its average daily net
assets. This fee is calculated daily and paid monthly.
For the six months ended June 30, 2000, SBAM waived a portion of the management
fees amounting to $25,138.
13
<PAGE>
Notes to Financial Statements
(unaudited) (continued)
SBAM also acts as administrator to the Fund. As compensation for its services
the Fund pays SBAM a fee calculated at an annual rate of 0.05% of its average
daily net assets. This fee is calculated daily and paid monthly. SBAM has
delegated its responsibilities as administrator to SSB Citi Fund Management LLC
("SSBC"), an affiliate of SBAM, pursuant to a Sub-Administration Agreement
between SBAM and SSBC.
CFBDS, Inc. acts as the Fund's distributor. For the six months ended June 30,
2000, Salomon Smith Barney Inc. ("SSB"), another subsidiary of SSBH, received
no brokerage commissions from the Fund.
3. Investments
During the six months ended June 30, 2000, the aggregate cost of purchases and
proceeds from sales of investments (including maturities, but excluding short-
term securities) were as follows:
<TABLE>
<S> <C>
Purchases............................................................ $3,907,307
==========
Sales ............................................................... $2,805,926
==========
</TABLE>
At June 30, 2000, the aggregate gross unrealized appreciation and depreciation
of investments for Federal income tax purposes were substantially as follows:
<TABLE>
<S> <C>
Gross unrealized appreciation..................................... $ 306,248
Gross unrealized depreciation..................................... (1,084,872)
-----------
Net unrealized depreciation....................................... $ (778,624)
===========
</TABLE>
4. Repurchase Agreements
The Fund purchases (and its custodian takes possession of) U.S. government se-
curities from banks and securities dealers subject to agreements to resell the
securities to the seller at a future date (generally, the next business day) at
an agreed-upon higher repurchase price. The Fund requires maintenance of the
market value of the collateral in amounts at least equal to the repurchase
price.
5. Reverse Repurchase Agreements
The Fund may enter into reverse repurchase agreements. A reverse repurchase
agreement involves a sale by the Fund of securities that it holds with an
agreement by the Fund to repurchase the same securities at an agreed upon price
and date. A reverse repurchase agreement involves risk that the market value of
the securities sold by the Fund may decline below the repurchase price of the
securities. The Fund will establish a segregated account with its custodian, in
which the Fund will maintain cash or other liquid securities with respect to
the reverse repurchase agreements.
During the six months ended June 30, 2000, the Fund did not enter into any re-
verse repurchase agreements.
14
<PAGE>
Notes to Financial Statements
(unaudited) (continued)
6. Options Contracts
The Fund may from time to time enter into options contracts. Premiums paid when
put or call options are purchased by the Fund, represent investments, which are
marked-to-market daily. When a purchased option expires, the Fund will realize
a loss in the amount of the premium paid. When the Fund enters into a closing
sales transaction, the Fund will realize a gain or loss depending on whether
the proceeds from the closing sales transaction are greater or less than the
premium paid for the option. When the Fund exercises a put option, it will re-
alize a gain or loss from the sale of the underlying security and the proceeds
from such sale will be decreased by the premium originally paid. When the Fund
exercises a call option, the cost of the security which the Fund purchases upon
exercise will be increased by the premium originally paid.
At June 30, 2000, the Fund did not hold any purchased call or put options.
When the Fund writes a call or put option, an amount equal to the premium
received by the Fund is recorded as a liability, the value of which is marked-
to-market daily. When a written option expires, the Fund realizes a gain equal
to the amount of the premium received. When the Fund enters into a closing
purchase transaction, the Fund realizes a gain or loss depending upon whether
the cost of the closing transaction is greater or less than the premium
originally received, without regard to any unrealized gain or loss on the
underlying security, and the liability related to such option is eliminated.
When a written call option is exercised the proceeds of the security sold will
be increased by the premium originally received. When a written put option is
exercised, the amount of the premium originally received will reduce the cost
of the security which the Fund purchased upon exercise. When written index
options are exercised, settlement is made in cash.
The Fund enters into options for hedging purposes. The risk associated with
purchasing options is limited to the premium originally paid. The risk in
writing a covered call option is that the Fund gives up the opportunity to
participate in any increase in the price of the underlying security beyond the
exercise price. The risk in writing a put option is that the Fund is exposed to
the risk of loss if the market price of the underlying security declines.
During the six months ended June 30, 2000, the Fund did not write any call or
put option contracts.
7. Securities Traded on a When Issued Basis
The Fund may from time to time purchase securities on a when-issued basis. In a
when-issued transaction, the Fund commits to purchasing securities which have
not yet been issued by the issuer. Securities purchased on a when-issued basis,
are not settled until they are delivered to the Fund. Beginning on the date the
Fund enters into the when-issued transaction, cash or other liquid securities
are segregated to cover the amount of the purchase price of the when-issued
security. These transactions are subject to market fluctuations and their
current value is determined in the same manner as for other securities.
At June 30, 2000, the Fund did not hold any when-issued securities.
8. Securities Traded on a To-Be-Announced Basis
The Fund may trade securities on a to-be-announced ("TBA") basis. In a TBA
transaction, the Fund commits to purchasing or selling securities for which
specific information is not yet known at the time of the trade, particularly
the face amount and maturity date in Government National Mortgage Association
("GNMA") transactions. Securities purchased on a TBA basis are not settled
until they are delivered to the Fund, normally 15 to 45 days later. Beginning
on the date the Fund enters into a TBA transaction, cash or other liquid
securities are segregated in the amount of the TBA transaction. These
transactions are subject to market fluctuations and their current value is
determined in the same manner as for other securities.
At June 30, 2000, the Fund did not hold any TBA securities.
15
<PAGE>
Notes to Financial Statements
(unaudited) (continued)
9. Lending of Securities
The Fund may lend its securities to brokers, dealers and other financial
organizations. The Fund has an agreement with its custodian whereby the
custodian may lend securities owned by the Fund to brokers, dealers and other
financial organizations. Fees earned by the Fund on securities lending are
recorded in interest income. Loans of securities by the Fund are collateralized
by cash or other liquid securities that are maintained at all times in an
amount at least equal to the current market value of the loaned securities,
plus a margin which may vary depending on the type of securities loaned. The
custodian establishes and maintains the collateral in a segregated account. The
Fund maintains exposure for the risk of any losses in the investment of amounts
received as collateral.
At June 30, 2000, the Fund did not have any securities on loan.
10. Loan Participations
The Fund may invest in loans arranged through private negotiation between one
or more financial institutions. The Fund's investment in any such loan may be
in the form of a participation in or an assignment of the loan.
In connection with purchasing participations, the Fund generally will have no
right to enforce compliance by the borrower with the terms of the loan
agreement relating to the loan, nor any rights of set-off against the borrower,
and the Fund may not benefit directly from any collateral supporting the loan
in which it has purchased the participation. As a result, the Fund will assume
the credit risk of both the borrower and the lender that is selling the
participation. In the event of the insolvency of the lender selling the
participation, the Fund may be treated as a general creditor of the lender and
may not benefit from any set-off between the lender and the borrower.
At June 30, 2000, the Fund held loan participations with a total cost of
$171,107.
11. Capital Loss Carryforward
At December 31, 1999, the Fund had, for Federal income tax purposes, a capital
loss carryforward of approximately $227,000, available to offset future capital
gains. To the extent that these carryforward losses can be used to offset net
realized capital gains, such gains, if any, will not be distributed. Expiration
occurs on December 31 of the year indicated:
<TABLE>
<CAPTION>
2006 2007 Total
------- -------- --------
<S> <C> <C> <C>
Carryforward Amounts.................................. $61,000 $166,000 $227,000
======= ======== ========
</TABLE>
16
<PAGE>
Notes to Financial Statements
(unaudited) (continued)
12. Capital Stock
At June 30, 2000, the Series had 10,000,000,000 shares of capital stock autho-
rized with a par value of $0.001 per share. Each share represents an equal pro-
portionate interest and has an equal entitlement to any dividends and distribu-
tions made by the Fund.
Transactions in shares were as follows:
<TABLE>
<CAPTION>
Six Months Ended Year Ended
June 30, 2000 December 31, 1999
---------------- -----------------
<S> <C> <C>
Shares sold............. 337,916 493,131
Shares issued on
reinvestment of
dividends.............. -- 62,274
Shares reacquired....... (243,704) (419,906)
-------- --------
Net Increase............ 94,212 135,499
======== ========
</TABLE>
17
<PAGE>
Financial Highlights
For a share of capital stock outstanding for the year ended December 31, except
where noted:
<TABLE>
<CAPTION>
2000(1) 1999 1998(2)
------- ------ -------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period............. $ 9.22 $ 9.58 $10.00
------ ------ ------
Income (Loss) From Operations:
Net investment income (3)....................... 0.41 0.88 0.43
Net realized and unrealized loss................ (0.46) (0.35) (0.42)
------ ------ ------
Total Income (Loss) From Operations............. (0.05) 0.53 0.01
------ ------ ------
Less Distributions From:
Net investment income........................... -- (0.88) (0.43)
Capital......................................... -- (0.01) (0.00)*
------ ------ ------
Total Distributions............................. -- (0.89) (0.43)
------ ------ ------
Net Asset Value, End of Period................... $ 9.17 $ 9.22 $ 9.58
====== ====== ======
Total Return (4)................................. (0.54)%++ 5.56% 0.14%++
Net Assets, End of Period (000s)................. $8,764 $7,940 $6,949
Ratios to Average Net Assets:
Expenses (3)(5)................................. 1.00%+ 1.00% 1.00%+
Net investment income........................... 9.59%+ 9.56% 7.25%+
Portfolio Turnover Rate.......................... 37% 58% 37%
</TABLE>
------
(1) For the six months ended June 30, 2000 (unaudited).
(2) For the period from May 1, 1998 (commencement of operations) through Decem-
ber 31, 1998.
(3) SBAM has waived all or a portion of its management fees for the six months
ended June 30, 2000, the year ended December 31, 1999 and the period ended
December 31, 1998. In addition, SBAM has reimbursed the Fund for expenses
of $3,963 and $11,942 for year ended December 31, 1999 and the period ended
December 31, 1998, respectively. If such fees were not waived and expenses
not reimbursed, the per share decrease in net investment income and the ac-
tual expense ratio would have been as follows:
<TABLE>
<CAPTION>
Expense Ratios
Net Investment Income Without Fee Waivers
Per Share Decreases and Reimbursement
--------------------- -------------------
<S> <C> <C>
2000.................. $0.03 1.62%+
1999.................. 0.07 1.80
1998.................. 0.06 2.04+
</TABLE>
(4) Total returns do not reflect expenses associated with the separate account
such as administrative fees, account charges and surrender charges which,
if reflected, would reduce the total returns for all periods shown. Total
returns may also reflect a voluntary expense cap imposed by Salomon Broth-
ers Asset Management Inc to limit total Fund operating expenses. Absent
this expense cap, total returns for the Fund would be lower. Expense caps
may be revised or terminated.
(5) As a result of a voluntary expense limitation, expense ratios will not ex-
ceed 1.00%.
* Amount represents less than $0.01.
++ Total return is not annualized, as it may not be representative of the to-
tal return for the year.
+ Annualized.
18
<PAGE>
(This page intentionally left blank.)
<PAGE>
Salomon Brothers Variable Series Funds Inc
INVESTMENT MANAGER
Salomon Brothers Asset Management Inc
7 World Trade Center
New York, New York 10048
CUSTODIAN
PFPC Trust Company
8800 Tinicom Blvd., Suite 200
Philadelphia, Pennsylvania 19153
LEGAL COUNSEL
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, New York 10017
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
Directors
CHARLES F. BARBER
Consultant; formerly Chairman; ASARCO Inc.
CAROL L. COLMAN
Consultant, Colman Consulting
DANIEL P. CRONIN
Vice President-General Counsel,
Pfizer International Inc.
HEATH B. MCLENDON
Chairman and President;
Managing Director, Salomon Smith Barney Inc.
President and Director, SSB Citi Fund Management LLC
and Travelers Investment Advisers, Inc.
Officers
HEATH B. MCLENDON
Chairman and President
LEWIS E. DAIDONE
Executive Vice President and Treasurer
ROSS S. MARGOLIES
Executive Vice President
BETH A. SEMMEL
Executive Vice President
PETER J. WILBY
Executive Vice President
GEORGE J. WILLIAMSON
Executive Vice President
JOHN B. CUNNINGHAM
Vice President
ANTHONY PACE
Controller
CHRISTINA T. SYDOR
Secretary
<PAGE>
[LOGO OF SALOMON BROTHERS ASSETS MANAGEMENT]
SEVEN WORLD TRADE CENTER . NEW YORK, NEW YORK 10048
<PAGE>
SALOMON BROTHERS
Variable Series Funds Inc
Semi - Annual Report 2000
JUNE 30, 2000
. STRATEGIC BOND FUND
<PAGE>
SALOMON BROTHERS VARIABLE SERIES FUNDS INC
Our Message to You
DEAR SHAREHOLDER:
We are pleased to provide you with the semi-annual report for the Salomon
Brothers Variable Strategic Bond Fund ("Fund") for the period ended June 30,
2000. This letter discusses general economic and market conditions as well as
Fund highlights during the reporting period(1). A detailed summary of
performance and current Fund holdings can be found in the appropriate sections
that follow. We hope you find this report useful and informative.
INVESTMENT STRATEGY & PERFORMANCE UPDATE
The Fund's primary objective is to seek a high level of current income, with
capital appreciation as a secondary objective. The Fund seeks to achieve its
objectives by investing in a globally diverse portfolio through allocations to
segments of the fixed-income market that the manager believes will best
contribute to the achievement of the Fund's investment objectives. Tactical
allocations may include U.S. and non-U.S. investment-grade, high-yield and
emerging market debt securities.
For the six months ended June 30, 2000, the Fund returned 2.48%. In comparison,
the Salomon Smith Barney Broad Investment-Grade ("BIG") Bond Index(2), returned
3.92% and the Lehman Brothers Aggregate Bond Index(3)returned 3.99%.
Emerging market debt returned 8.10% for the period as measured by the J.P.
Morgan Emerging Markets Bond Index Plus ("EMBI+")(4). Rising oil prices and
rising interest rates were the predominant fundamental factors impacting returns
during the year. Individual country returns were dominated by Russia, which
gained 49.78%. Overall market performance was good with many countries
generating positive returns although no countries generated returns approaching
Russia's.
The performance of emerging debt markets was particularly strong in light of the
difficult fixed-income environment. The Federal Reserve Board ("Fed") raised
interest rates three times during the period, moving the federal funds
---------------
1 The information provided represents the opinion of the manager and is not
to be a forecast of future results.
2 The BIG Bond Index includes institutionally traded U.S. Treasury bonds,
government-sponsored bonds (U.S. agency and supranational), mortgage-backed
securities and corporate securities. An investor cannot invest directly in
an index.
3 The Lehman Brothers Aggregate Bond Index is a broad measure of the
performance of taxable bonds in the U.S. market, with maturities of at
least one year. The index is comprised of U.S. Treasury bonds, government
agency bonds, mortgage-backed securities and corporate bonds. An investor
cannot invest directly in an index.
4 The EMBI+ is a total return index that tracks the traded market for U.S.
dollar-denominated Brady and other similar sovereign restructured bonds
traded in the emerging market. An investor cannot invest directly in an
index.
1
1
<PAGE>
rate/5/ from 5.50% to 6.50%. This aggressive stance by the Fed was an attempt to
slow the rate of U.S. economic growth and keep inflation under control. The
aggressive Fed activity and widening spreads led to subpar returns in most
fixed-income asset classes other than emerging markets debt.
The high-yield bond market returned a negative 1.42% for the period, as reported
by the Salomon Smith Barney High Yield Market Index. As the Fed hiked interest
rates by 25 basis points/6/ in February and the tech-laden Nasdaq Composite
Index/7/ turned in a relatively strong performance early in calendar year 2000,
a string of mutual fund outflows ensued as investors fled the interest rate-
sensitive fixed-income markets for the strong equity markets. As the U.S. equity
markets became more volatile in March and April and the Fed announced a 50 basis
point interest rate increase with a tightening bias in May, mutual fund outflows
intensified as investors focused on the potential for further interest rate
increases. Investors also increasingly considered the possibility of a cyclical
downturn in the near term, which would exacerbate already high default rates. As
a result, mutual fund outflows for the period totaled $5.9 billion. In June,
however, benign economic data and a more passive Fed mitigated interest rate
concerns while the high absolute yields available in the high-yield market
attracted investors from the volatile equity markets.
For the six months ended June 30, 2000, the top performing sectors in the high-
yield market included telecommunications, energy, technology, utilities and
gaming. Telecommunications performance was driven by explosive industry growth,
continued mergers and acquisitions and equity investment activity. High product
prices supported positive performance in energy. Technology's performance
benefited from good fourth quarter results and the popularity of the sector in
the equity markets early in the period. Utilities and gaming, which are
generally composed of higher rated issuers, benefited from investors' preference
for higher-quality issues.
The most significant underperforming sectors consisted of automotive,
steel/metals, capital goods, leisure/lodging, supermarkets/drugstores and
services/other. Automotive was adversely affected by weakness in the parts
aftermarket. Steel/metal's performance was hurt by product price weakness.
Additionally, automotive, steel/metals and capital goods were negatively
impacted by increased cyclical concerns. Leisure/lodging was adversely
--------------
5 The federal funds rate is the interest rate that banks with excess reserves
at a Federal Reserve district bank charge other banks that need overnight
loans. The fed funds rate, as it is called, often points to the direction
of U.S. interest rates.
6 A basis point is 0.01% or one one-hundredth of a percent.
7 The Nasdaq Composite Index is a market value-weighted index that measures
all domestic and non-U.S. based securities listed on the NASDAQ stock
market. An investor cannot invest directly in an index.
2
<PAGE>
affected by operating difficulties at several issuers resulting from
overcapacity in the theatre operator sector. Supermarkets/drugstores performance
was adversely affected by difficulties at Rite Aid and Pathmark.
While inflation has edged higher this year, the most recent price data has not
aggravated the picture and there is a reasonable chance that if demand is
cooling, an important source of potential wage and price pressures would be
contained. Thus, with a lot of tightening under its belt, and some tentative
signs that it's having an effect while inflation is still reasonably low, the
Fed can maintain that a pause may be warranted. Whatever their immediate
intentions, officials likely still see the risks toward higher inflation. The
slowing signs are too tentative, especially in the labor markets. We therefore
anticipate at least a quarter-point of further tightening will be forthcoming
this year, pushing the funds rate to 6.75% or higher.
Thank you for your investment in the Salomon Brothers Variable Strategic Bond
Fund. We look forward to helping you pursue your financial goals in the new
century.
Sincerely,
/S/ Heath B. McLendon /S/ Peter J. Wilby
Heath B. McLendon Peter J. Wilby
Chairman and President Executive Vice President
July 26, 2000
3
3
<PAGE>
The following graph depicts the performance of the Strategic Bond Fund versus
the Lehman Brothers Aggregate Bond Index. It is important to note that the Fund
is a professionally managed mutual fund while the index is not available for
investment and is unmanaged. The comparison is shown for illustrative purposes
only.
HISTORICAL PERFORMANCE (unaudited)
SALOMON BROTHERS VARIABLE STRATEGIC BOND FUND
Comparison of $10,000 Investment in the Fund with
Lehman Brothers Aggregate Bond Index
Lehman Brothers
Date Strategic Aggregate Bond
Bond Fund Index
--------------------------------------------------------------------------------
2/17/98 10,000 10,000
6/98 10,190 10,269
12/98 10,617 10,739
6/99 10,533 10,591
12/99 10,657 10,650
6/30/00 10,922 11,075
Past performance is not predictive of future performance. The graph does not
reflect expenses associated with the separate account as administrative fees,
account charges and surrender charges which, if reflected, would reduce the
performance shown.
--------------------------------------------------------------------------------
Historical Performance
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Asset Value
---------------
Beginning End Income Capital Gain Return of Total
Period Ended of Period of Period Dividends Distribution Capital Returns+
==============================================================================================
<S> <C> <C> <C> <C> <C> <C>
6/30/00 $ 9.66 $ 9.90 $ 0.00 $ 0.00 $ 0.00 2.48%++
----------------------------------------------------------------------------------------------
12/31/99 10.13 9.66 0.51 0.00 0.00 0.37
----------------------------------------------------------------------------------------------
Inception*-- 12/31/98 10.00 10.13 0.47 0.01 0.01 6.18++
==============================================================================================
$ 0.98 $ 0.01 $ 0.01
==============================================================================================
----------------------------------------------------------------------------------------------
Average Annual Total Returns+
----------------------------------------------------------------------------------------------
Six Months Ended 6/30/00 2.48%++
----------------------------------------------------------------------------------------------
Year Ended 6/30/00 3.69
----------------------------------------------------------------------------------------------
Inception* through 6/30/00 3.80
==============================================================================================
----------------------------------------------------------------------------------------------
Cumulative Total Return+
----------------------------------------------------------------------------------------------
Inception* through 6/30/00 9.22%
==============================================================================================
</TABLE>
+ Assumes the reinvestment of all dividends and capital gains distributions
at net asset value. Total returns do not reflect expenses associated with
the separate accounts such as administrative fees, account charges and
surrender charges which, if reflected, would reduce the total return for
all periods shown. Total returns may also reflect a voluntary expense cap
imposed by Salomon Brothers Asset Management Inc to limit total Fund
operating expenses. Absent this expense cap, total returns for the Fund
would be lower. Expense caps may be revised or terminated.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
* Inception date is February 17, 1998.
4
<PAGE>
Schedule of Investments
June 30, 2000 (unaudited)
<TABLE>
<CAPTION>
Face
Amount Security Value
<C> <C> <S> <C>
-------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCIES & OBLIGATIONS -- 35.3%
U.S. Treasury Bonds:
$ 10,000 6.125% due 11/15/27 (a)....................... $ 9,972
35,000 5.500% due 8/15/28 (a)........................ 32,113
250,000 5.250% due 2/15/29 (a)........................ 221,875
500,000 6.125% due 8/15/29 (a)........................ 505,750
500,000 6.250% due 5/15/30 (a)........................ 525,000
U.S. Treasury Notes:
1,000,000 6.500% due 3/31/02 (a)........................ 1,000,620
10,000 4.750% due 2/15/04............................ 9,513
500,000 5.875% due 11/15/04 (a)....................... 492,510
Federal National Mortgage Association (FNMA):
675,000 6.000%, 30 years (b)(c)....................... 617,409
1,500,000 7.000%, 30 years (b)(c)....................... 1,447,500
2,000,000 7.500%, 30 years (b)(c)....................... 1,971,860
2,175,000 8.000%, 30 years (b)(c)....................... 2,183,831
-----------
TOTAL U.S. GOVERNMENT AGENCIES & OBLIGATIONS
(Cost -- $9,015,293).......................... 9,017,953
-----------
ASSET-BACKED SECURITIES -- 0.3%
100,000 ContiMortgage Home Equity Loan
Trust, Series 1999-
3, Class B, 7.000% due 7/25/30 (Cost --
$84,250).................................... 63,984
-----------
COMMERCIAL MORTGAGE-BACKED SECURITIES -- 1.3%
125,000 Commercial Mortgage Asset Trust, Series 1999-
C1, Class C, 7.350% due 8/17/13.............. 117,852
DLJ Commercial Mortgage Corp.:
981,872 Series 1998-CF2, Class S, 0.8477% due 11/12/31
(d).......................................... 47,552
586,586 Series 1998-CG1, Class S, 0.7026% due 5/10/23
(d).......................................... 22,904
150,000 LB Commercial Conduit Mortgage Trust, Series
1999-C1, Class A2, 6.780% due 4/15/09........ 143,662
-----------
TOTAL COMMERCIAL MORTGAGE-BACKED SECURITIES
(Cost -- $343,979)............................ 331,970
-----------
MORTGAGE-BACKED SECURITIES -- 6.5%
87,784 Countrywide Mortgage Backed Securities, Inc.,
Series 1994-J, Class B1, 7.750% due 6/25/24.. 85,178
FANNIEMAE-ACES:
33,987 Series 1996-M6, Class A, 7.3935% due 8/17/03.. 33,912
1,285,506 Series 1999-M3, Class N, 1.0414% due 6/25/38
(d).......................................... 71,099
984,361 Series 2000-M1, Class A, 7.3685% due 1/17/13.. 994,204
24,202 First Union Residential Securitization, Series
1998-A, Class B2, 7.000% due 8/25/28......... 21,372
98,224 GE Capital Mortgage Services Inc., Series
1998-15, Class B1, 6.750% due 11/25/28....... 88,356
92,395 Green Tree Financial, Series 1997-6, Class A8,
7.070% due 1/15/29........................... 87,313
109,533 Mid-State Trust, Series 6, Class A1, 7.340%
due 7/1/35................................... 105,562
PNC Mortgage Securities:
24,438 Series 1998-4, Class 3B3, 6.750% due 5/25/28.. 20,688
24,423 Series 1998-4, Class CB3, 6.8412% due
5/25/28...................................... 20,995
24,278 Series 1998-5, Class CB3, 6.735% due 7/25/28.. 20,644
74,032 Series 1999-1, Class CB2, 6.772% due 3/25/29.. 64,870
63,807 Series 1999-2, Class DB3, 6.9053% due
4/25/29...................................... 53,000
-----------
TOTAL MORTGAGE-BACKED SECURITIES
(Cost -- $1,697,862 )......................... 1,667,193
-----------
</TABLE>
See Notes to Financial Statements.
5
<PAGE>
Schedule of Investments
June 30, 2000 (unaudited) (continued)
<TABLE>
<CAPTION>
Face
Amount Security Value
<C> <C> <S> <C>
-------------------------------------------------------------------------------
<CAPTION>
CORPORATE BONDS & NOTES -- 19.1%
<C> <C> <S> <C>
Basic Industries -- 2.4%
$ 125,000 AEI Resources Inc., Company Guaranteed, $ 25,625
10.500% due 12/15/05 (e).....................
40,000 AK Steel Corp., Company Guaranteed, 7.875% due 35,700
2/15/09......................................
100,000 Doman Industries Ltd., Company Guaranteed, 100,500
12.000% due 7/1/04...........................
125,000 Lyondell Chemical Co., Series B, Sr. Secured 123,750
Notes, 9.875% due 5/1/07.....................
50,000 Murrin Murrin Holdings Property, Sr. Notes, 43,500
9.375% due 8/31/07...........................
50,000 Owens-Illinois Inc., Sr. Debentures, 7.500% 42,937
due 5/15/10..................................
125,000 PCI Chemicals Canada Inc., Series B, Sr. 78,125
Secured Notes, 9.250% due 10/15/07 (a).......
25,000 Radnor Holdings Inc., Series B, Sr. Notes, 22,500
10.000% due 12/1/03..........................
25,000 Raytheon Co., 6.150% due 11/1/08.............. 22,218
25,000 Tembec Industries Inc., Company Guaranteed, 24,125
8.625% due 6/30/09...........................
100,000 USX Corp., 7.200% due 2/15/04................. 98,375
-----------
617,355
-----------
Consumer Cyclicals -- 1.6%
100,000 DaimlerChrysler NA Holding, Company 100,750
Guaranteed, 7.750% due 5/27/03...............
115,000 Finlay Fine Jewelry Corp., Sr. Notes, 8.375% 102,925
due 5/1/08...................................
125,000 HMH Properties, Series B, Sr. Notes, 7.875% 112,812
due 8/1/08...................................
25,000 Vlasic Foods International Inc., Sr. Sub. 8,875
Notes, 10.250% due 7/1/09....................
50,000 Wal-Mart Stores, 7.550% due 2/15/30........... 51,250
50,000 WestPoint Stevens, Inc., Sr. Notes, 7.875% due 42,000
6/15/05......................................
-----------
418,612
-----------
Consumer Non-Cyclicals -- 2.7%
25,000 Columbia Healthcare Co., 6.910% due 6/15/05... 22,875
50,000 Derby Cycle Corp., Sr. Notes, 10.000% due 20,250
5/15/08......................................
50,000 French Fragrances Inc., Series B, Sr. Notes, 48,250
10.375% due 5/15/07 (a)......................
125,000 Fresenius Medical Care Capital Trust I, 119,062
Company Guaranteed, 9.000% due 12/1/06.......
100,000 Kroger Co., Sr. Notes, 7.650% due 4/15/07..... 98,000
125,000 MGM Grand Inc., Sr. Sub. Notes, 9.750% due 127,813
6/1/07.......................................
50,000 North Atlantic Trading Co., Inc., Series B, 45,375
Sr. Notes, 11.000% due 6/15/04...............
125,000 Park Place Entertainment Corp., Sr. Sub. 117,813
Notes, 7.875% due 12/15/05...................
60,000 Pueblo Xtra International, Sr. Notes, 9.500% 27,900
due 8/1/03...................................
50,000 Tenet Healthcare Corp., Sr. Notes, 9.250% due 50,625
9/1/10 (e)...................................
-----------
677,963
-----------
Energy -- 1.5%
50,000 Belco Oil & Gas Corp., Series B, Sr. Sub. 46,500
Notes, 8.875% due 9/15/07....................
25,000 Canadian Forest Oil Ltd., Sr. Sub. Notes, 23,625
8.750% due 9/15/07...........................
125,000 Clark Refining & Marketing, Inc., Sr. Sub. 80,625
Notes, 8.875% due 11/15/07 (a)...............
50,000 Key Energy Services, Inc., Series B, Sr. Sub. 56,500
Notes, 14.000% due 1/15/09...................
25,000 Ocean Energy Inc., Series B, Sr. Sub. Notes, 25,000
8.875% due 7/15/07...........................
25,000 Pioneer Natural Resource, Company Guaranteed, 25,844
9.625% due 4/1/10............................
Plains Resources Inc., Company Guaranteed:
25,000 10.250% due 3/15/06.......................... 25,313
25,000 10.250% due 3/15/06 (e)...................... 25,313
75,000 Union Oil Co. of California, 7.350% due 72,938
6/15/09......................................
-----------
381,658
-----------
Financial Services -- 1.8%
100,000 Bank of America Corp., Sr. Notes, 7.875% due 101,250
5/16/05......................................
125,000 ContiFinancial Corp., Sr. Notes, 8.125% due 15,625
4/1/08 (f)...................................
50,000 Countrywide Home Loans, Inc. Medium-Term 43,813
Notes, 6.250% due 4/15/09....................
Morgan Stanley Dean Witter & Co., 7.750% due
125,000 6/15/05....................................... 125,780
</TABLE>
See Notes to Financial Statements.
6
<PAGE>
Schedule of Investments
June 30, 2000 (unaudited) (continued)
<TABLE>
<CAPTION>
Face
Amount Security Value
<C> <C> <S> <C>
-------------------------------------------------------------------------------
Financial Services -- 1.8% (continued)
PaineWebber Group Inc.:
$ 100,000 7.750% due 9/1/02............................ $ 95,500
50,000 7.625% due 12/1/09........................... 47,313
20,000 TPSA Finance BV, Company Guaranteed, 7.750% 18,450
due 12/10/08 (e).............................
-----------
447,731
-----------
Housing Related -- 0.6%
50,000 Forest City Enterprises, Sr. Notes, 8.500% due
3/15/08 (a)................................... 45,500
125,000 Nortek Inc., Sr. Sub. Notes, 9.875% due
3/1/04........................................ 119,375
-----------
164,875
-----------
Manufacturing -- 1.6%
125,000 Axiohm Transaction Solutions Inc., Sr. Sub.
Notes, 9.750% due 10/1/07 (a)(f)(g)........... 25,938
125,000 Breed Technologies, Inc., Sr. Sub. Notes,
9.250% due 4/15/08 (f)(g)..................... 1,405
50,000 Federal-Mogul Co., Company Guaranteed, 7.500%
due 1/15/09................................... 34,313
75,000 High Voltage Engineering Corp., Sr. Notes,
10.500% due 8/15/04........................... 52,125
50,000 Jordan Industries, Series C, Sr. Notes,
10.375% due 8/1/07............................ 46,000
125,000 Navistar International Corp., Series B, Sr.
Sub. Notes, 8.000% due 2/1/08 (a)............. 115,313
125,000 Newport News Shipbuilding Inc., Sr. Sub.
Notes, 9.250% due 12/1/06..................... 125,625
-----------
400,719
-----------
Media & Telecommunications -- 4.8%
17,091 Adelphia Communications Corp., Sr. Notes,
9.500% due 2/15/04 (h)........................ 16,577
20,000 Centennial Cellular Corp., 10.750% due
12/15/08...................................... 19,525
125,000 Century Communications, Sr. Notes, 8.875% due
1/15/07 (a)................................... 115,625
200,000 Charter Communications Holdings LLC, Sr.
Discount Notes, zero coupon until 4/1/04,
9.920% thereafter, due 4/1/11................ 114,000
60,000 Covad Communications Group, Sr. Notes, 12.000%
due 2/15/10 (e)............................... 47,100
125,000 CSC Holdings, Sr. Debentures, 7.625% due
7/15/18 (a)................................... 112,343
50,000 Global Crossing Holding Ltd., Sr. Notes,
9.125% due 11/15/06........................... 48,125
125,000 Hollinger International Publishing Inc., Sr.
Sub. Notes, 9.250% due 3/15/07 (a)............ 123,750
200,000 Intermedia Commmunications Inc., Sr. Discount
Notes, zero coupon until 3/1/04,
12.250% thereafter, due 3/1/09............... 121,500
125,000 Nextel Communications Inc., Sr. Discount
Notes, zero coupon until 10/31/02,
9.750% thereafter, due 10/31/07.............. 93,438
10,000 PSINet Inc., Sr. Notes, 11.000% due 8/1/09.... 9,300
50,000 Price Communications Wireless Inc., Sr. Sub.
Notes, 11.750% due 7/15/07.................... 54,000
25,000 Rogers Cantel, Inc., Debentures, 9.375% due
6/1/08........................................ 25,875
125,000 Sitel Corp., 9.000% due 3/15/06 (a)........... 114,375
125,000 Sprint Capital Corp., Company Guaranteed,
5.700% due 11/15/03........................... 118,593
100,000 TeleWest Communications PLC, Debentures, zero
coupon until 10/1/00, 11.000% thereafter, due
10/1/07....................................... 95,250
-----------
1,229,376
-----------
Real Estate Investment Trust -- 0.2%
50,000 Spieker Properties L.P., 7.250% due 5/1/09.... 46,625
-----------
Services & Other -- 1.1%
25,000 Aqua-Chem, Inc. Sr. Sub. Notes, 11.250% due
7/1/08........................................ 14,188
50,000 Avis Rent A Car, Inc., Sr. Sub. Notes, 11.000%
due 5/1/09.................................... 52,375
125,000 Cendant Corp., 7.750% due 12/1/03............. 120,780
50,000 Iron Mountain Inc., Sr. Sub. Notes, 8.750% due
9/30/09....................................... 46,250
50,000 Primark Corp., Sr. Sub. Notes, 9.250% due
12/15/08...................................... 55,250
-----------
288,843
-----------
</TABLE>
See Notes to Financial Statements.
7
<PAGE>
Schedule of Investments
June 30, 2000 (unaudited) (continued)
<TABLE>
<CAPTION>
Face
Amount Security Value
<C> <C> <S> <C>
-------------------------------------------------------------------------------
Technology -- 0.2%
$ 50,000 Polaroid Corp., Sr. Notes, 11.500% due
2/15/06.................................. $ 52,250
-----------
Transportation -- 0.2%
25,000 Northwest Airlines Inc., Company
Guaranteed, 7.625% due 3/15/05........... 22,125
25,000 Stena AB, Sr. Notes, 8.750% due 6/15/07... 21,938
-----------
44,063
-----------
Utilities -- 0.4%
Azurix Corp., Sr. Notes, 10.750% due
50,000 2/15/10 (e).............................. 48,375
Calpine Corp., Sr. Notes, 7.750% due
25,000 4/15/09.................................. 23,688
GTE Corp., Debentures, 6.940% due 4/15/28
40,000 (i)...................................... 35,450
-----------
107,513
-----------
TOTAL CORPORATE BONDS & NOTES
(Cost -- $5,579,540)...................... 4,877,583
-----------
SOVEREIGN BONDS (j) -- 9.8%
Argentina -- 0.9%
Republic of Argentina:
50,000 11.750% due 4/7/09........................ 46,588
132,000 11.750 due 6/15/15........................ 119,790
75,000 11.375% due 1/30/17 (a)................... 67,331
-----------
233,709
-----------
Brazil -- 1.2%
Federal Republic of Brazil:
90,000 14.500% due 10/15/09 (a).................. 95,333
251,207 C Bonds, 8.000% due 4/15/14 (a)(h)........ 182,282
50,000 DCB, Series L, 7.000% due 4/15/12 (k)..... 36,938
-----------
314,553
-----------
Bulgaria -- 0.3%
Republic of Bulgaria:
50,000 FLIRB, Series A, 2.750% due 7/28/12 (k)... 36,875
50,000 IAB, 6.500% due 7/28/11 (k)............... 39,688
-----------
76,563
-----------
Colombia -- 0.3%
75,000 Republic of Colombia, 10.875% due 3/9/04
(a)...................................... 70,125
-----------
Croatia -- 0.2%
54,975 Republic of Croatia, Series B, 7.065% due
7/31/06 (k).............................. 51,951
-----------
Germany -- 2.9%
Deutschland Republic:
30,000 EUR 6.500% due 7/15/03........................ 29,888
680,000 EUR 7.375% due 1/3/05......................... 708,883
-----------
738,771
-----------
Greece -- 0.3%
20,000,000 GRD Hellenic Republic, 9.700% due 5/27/01..... 58,341
-----------
Italy -- 0.1%
Buoni Poliennali del Tes:
16,000 EUR 9.500% due 2/1/01......................... 15,738
17,000 EUR 5.250% due 11/1/29........................ 14,919
-----------
30,657
-----------
</TABLE>
See Notes to Financial Statements.
8
<PAGE>
Schedule of Investments
June 30, 2000 (unaudited) (continued)
<TABLE>
<CAPTION>
Face
Amount Security Value
<C> <C> <S> <C>
-------------------------------------------------------------------------------
Ivory Coast -- 0.1%
200,000 Ivory Coast, FLIRB, due 3/29/18 (f)....... $ 32,000
-----------
Mexico -- 0.6%
United Mexican States:
40,000 10.375% due 2/17/09 (a)................... 41,370
100,000 11.375% due 9/15/16....................... 114,600
-----------
155,970
-----------
Panama -- 0.1%
40,000 Republic of Panama 8.875% due 9/30/27..... 33,750
-----------
Peru -- 0.1%
50,000 Republic of Peru, PDI, 4.500% due 3/7/17
(a)(k)................................... 33,438
-----------
Philippines -- 0.1%
50,000 Bangko Sentral Pilipinas, 8.600% due
6/15/27.................................. 35,625
-----------
Poland -- 0.2%
240,000 PLN Nordic Investment Bank, 17.750% due
4/15/02.................................. 54,712
-----------
Russia -- 0.8%
Russian Government:
200,000 IAN, due 12/15/15 (f)(g).................. 62,125
150,000 Ministry of Finance, 12.750% due 6/14/28
(a)...................................... 130,313
-----------
192,438
-----------
Spain -- 0.5%
Kingdom of Spain:
110,000 EUR 6.000% due 1/31/08....................... 108,715
22,000 EUR 6.150% due 1/31/13....................... 22,030
-----------
130,745
-----------
Sweden -- 0.1%
100,000 SEK Kingdom of Sweden, 10.250% due 5/5/03..... 12,878
-----------
Venezuela -- 1.0%
Republic of Venezuela:
125,000 13.625% due 8/15/18 (a)................... 116,250
166,665 FLIRB Series B, 7.4375% due 3/31/07 (k)... 136,665
-----------
252,915
-----------
TOTAL SOVEREIGN BONDS
(Cost -- $2,446,015)...................... 2,509,141
-----------
LOAN PARTICIPATIONS -- 0.9%
Algeria -- 0.2%
75,000 Algeria Tranche 3, 7.1875% due 3/4/10
(Chase) (k)(l)........................... 58,313
-----------
Morocco -- 0.2%
58,307 Kingdom of Morocco, Tranche A, 7.750% due
1/1/09 (J.P. Morgan) (k)(l).............. 52,476
-----------
Russia -- 0.5%
Russian Government, Principal Loan, due
12/15/20 (SBC Warburg Dillon Read)
375,000 (f)(g)(l) ............................... 115,313
-----------
TOTAL LOAN PARTICIPATIONS
(Cost -- $177,151)........................ 226,102
-----------
SUB-TOTAL INVESTMENTS
(Cost -- $19,344,090)..................... 18,693,926
-----------
</TABLE>
See Notes to Financial Statements.
9
<PAGE>
Schedule of Investments
June 30, 2000 (unaudited) (continued)
<TABLE>
<CAPTION>
Face
Amount Security Value
<C> <C> <S> <C>
-------------------------------------------------------------------------------
REPURCHASE AGREEMENTS -- 26.8%
$ 3,414,000 J.P. Morgan Securities, 6.400% due 7/3/00;
Proceeds at maturity -- $3,415,821; (Fully
collateralized by U.S.
Treasury Bonds, 8.875% due 2/15/19; Market
value -- $3,482,291) (a).................. $ 3,414,000
3,414,000 SBC Warburg Dillon Read Inc., 6.550% due
7/3/00; Proceeds at maturity --
$3,415,863; (Fully collateralized
by U.S. Treasury Bonds, 12.000% due
8/15/13; Market value -- $3,482,981)...... 3,414,000
-----------
TOTAL REPURCHASE AGREEMENTS
(Cost -- $6,828,000)....................... 6,828,000
-----------
TOTAL INVESTMENTS -- 100%
(Cost -- $26,172,090*)..................... $25,521,926
===========
</TABLE>
------
(a) All or a portion of the security is segregated as collateral for mortgage
dollar rolls/TBAs.
(b) Mortgage dollar roll (See Note 10).
(c) Security is issued on a to-be-announced ("TBA") basis (See Note 9).
(d) Interest only security.
(e) Security is exempt from registration under Rule 144A of the Securities Act
of 1933. This security may be resold in transactions that are exempt from
registration, normally to qualified institutional buyers.
(f) Security is currently in default.
(g) Non-income producing security.
(h) Payment-in-kind security for which all or a portion of the interest earned
is paid by the issuance of additional bonds.
(i) On July 3, 2000, Bell Atlantic Corp. and GTE Corp. merged. The surviving
company was renamed Verizon Communications.
(j) Face amount denominated in U.S. dollars unless otherwise indicated.
(k) Rate shown reflects current rate in effect at June 30, 2000 on instrument
with variable rates or step coupon rates.
(l) Participation interests were acquired through the financial institutions
indicated parenthetically.
* Aggregate cost for Federal income tax purposes is substantially the same.
Abbreviations used in this schedule:
C Bond -- Capitalization Bonds.
DCB -- Debt Conversion Bonds.
EUR -- Euro.
FLIRB -- Front-Loaded Interest Reduction Bonds.
GRD -- Greek Drachma.
IAB -- Interest Arrears Bonds.
IAN -- Interest Arrears Notes.
PDI -- Past-Due Interest.
PLN -- Polish Zloty.
SEK -- Swedish Krona.
See Notes to Financial Statements.
10
<PAGE>
Statement of Assets and Liabilities
June 30, 2000 (unaudited)
<TABLE>
<S> <C>
ASSETS:
Investments, at value (Cost -- $19,344,090)...................... $18,693,926
Repurchase agreements, at value (Cost -- $6,828,000)............. 6,828,000
Cash............................................................. 724
Foreign currency, at value (Cost -- $607)........................ 608
Interest receivable.............................................. 248,716
Receivable for open forward foreign currency contracts (Note 6).. 32,113
Deferred organization costs...................................... 16,450
-----------
Total Assets..................................................... 25,820,537
-----------
LIABILITIES:
Payable for securities purchased................................. 6,203,796
Payable for open forward foreign currency contracts (Note 6)..... 32,511
Management fees payable.......................................... 7,747
Administration fees payable...................................... 789
Accrued expenses................................................. 19,965
-----------
Total Liabilities................................................ 6,264,808
-----------
Total Net Assets................................................. $19,555,729
===========
NET ASSETS:
Par value of capital shares...................................... $ 1,976
Capital paid in excess of par value.............................. 19,864,950
Undistributed net investment income.............................. 640,081
Accumulated net realized loss from security transactions and
foreign currencies.............................................. (300,727)
Net unrealized depreciation of investments and foreign
currencies...................................................... (650,551)
-----------
Total Net Assets................................................. $19,555,729
===========
Shares Outstanding................................................ 1,975,502
-----------
Net Asset Value, per share........................................ $9.90
-----------
</TABLE>
See Notes to Financial Statements.
11
<PAGE>
Statement of Operations
For the Six Months Ended June 30, 2000 (unaudited)
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest............................................................ $752,300
--------
EXPENSES:
Management fees (Note 2)............................................ 66,534
Shareholder communications.......................................... 10,920
Audit and legal..................................................... 10,274
Shareholder and system servicing fees............................... 7,811
Custody............................................................. 5,961
Administration fees (Note 2)........................................ 4,436
Amortization of deferred organization costs......................... 3,114
Directors' fees..................................................... 2,366
Registration fees................................................... 994
Other............................................................... 2,518
--------
Total Expenses...................................................... 114,928
Less: Management fee waiver (Note 2)................................ (26,216)
--------
Net Expenses........................................................ 88,712
--------
Net Investment Income................................................ 663,588
--------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS, OPTIONS
AND FOREIGN CURRENCIES (NOTES 3, 6 AND 7):
Realized Loss From:
Security transactions (excluding short-term securities)............. (260,469)
Options purchased................................................... (7,125)
Foreign currency transactions....................................... (8,989)
--------
Net Realized Loss................................................... (276,583)
--------
Change in Net Unrealized Depreciation of Investments and Foreign
Currencies:
Beginning of period................................................. (709,116)
End of period....................................................... (650,551)
--------
Decrease in Net Unrealized Depreciation.............................. 58,565
--------
Net Loss on Investments, Options and Foreign Currencies.............. (218,018)
--------
Increase in Net Assets From Operations............................... $445,570
========
</TABLE>
See Notes to Financial Statements.
12
<PAGE>
Statements of Changes in Net Assets
For the Six Months Ended June 30, 2000 (unaudited)
and the Year Ended December 31, 1999
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
OPERATIONS:
Net investment income.............................. $ 663,588 $ 939,434
Net realized loss.................................. (276,583) (43,120)
(Increase) decrease in net unrealized
depreciation...................................... 58,565 (803,204)
----------- -----------
Increase in Net Assets From Operations............. 445,570 93,110
----------- -----------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income.............................. -- (832,612)
Net realized gains................................. -- (2,419)
----------- -----------
Decrease in Net Assets From Distributions to
Shareholders...................................... -- (835,031)
----------- -----------
FUND SHARE TRANSACTIONS (NOTE 14):
Net proceeds from sale of shares................... 5,727,300 17,170,169
Net assets value of shares issued for reinvestment
of dividends...................................... -- 835,031
Cost of shares reacquired.......................... (3,326,223) (10,992,052)
----------- -----------
Increase in Net Assets From Fund Share
Transactions...................................... 2,401,077 7,013,148
----------- -----------
Increase in Net Assets.............................. 2,846,647 6,271,227
NET ASSETS:
Beginning of period................................ 16,709,082 10,437,855
----------- -----------
End of period*..................................... $19,555,729 $16,709,082
=========== ===========
* Includes undistributed (overdistributed) net
investment income of:.............................. $640,081 $(14,518)
=========== ===========
</TABLE>
Statement of Cash Flows
For the Six Months Ended June 30, 2000 (unaudited)
<TABLE>
<S> <C>
CASH FLOWS USED BY OPERATING ACTIVITIES:
Purchases of long-term portfolio investments.................... $(11,197,110)
Proceeds from disposition of long-term portfolio investments and
principal paydowns............................................. 9,924,555
Net purchase of short-term portfolio investments................ (1,687,520)
------------
(2,960,075)
Net investment income........................................... 663,588
Amortization of net premium/discount on investments............. (48,742)
Amortization of organization expenses........................... 3,114
Interest in payment-in-kind bonds............................... (4,580)
Net change in receivables/payables related to operations........ 53,154
------------
Net Cash Flows Used By Operating Activities..................... (2,293,541)
------------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Net proceeds from sale of shares................................ 5,727,300
Cost of shares reacquired....................................... (3,345,247)
Decrease in dollar rolls transactions........................... (88,375)
------------
Net Cash Flows Provided By Financing Activities................. 2,293,678
------------
Net Increase in Cash............................................. 137
Cash, Beginning of Period........................................ 587
------------
Cash, End of Period.............................................. $ 724
============
</TABLE>
See Notes to Financial Statements.
13
<PAGE>
Notes to Financial Statements
(unaudited)
1. Organization and Significant Accounting Policies
Salomon Brothers Variable Strategic Bond Fund ("Fund"), is a separate
diversified investment portfolio of the Salomon Brothers Variable Series Funds
Inc ("Series") whose primary investment objective is to seek a high level of
current income and secondarily capital appreciation. The Series, a Maryland
corporation, is registered under the Investment Company Act of 1940, as amended
("1940 Act"), as an open-end management investment company and consists of this
Fund and seven other investment portfolios: Salomon Brothers Variable Total
Return Fund, Salomon Brothers Variable High Yield Bond Fund, Salomon Brothers
Variable Investors Fund, Salomon Brothers Variable Capital Fund, Salomon
Brothers Variable Small Cap Growth Fund, Salomon Brothers Variable U.S.
Government Income Fund and Salomon Brothers Variable Asia Growth Fund. The U.S.
Government Income Fund and Asia Growth Fund have not yet commenced operations.
The financial statements and financial highlights for the other investment
portfolios are presented in separate shareholder reports. The Fund and each
other investment portfolio of the Series is offered exclusively for use with
certain variable annuity and variable life insurance contracts offered through
the separate accounts of various life insurance companies and qualified pension
and retirement plans.
The significant accounting policies consistently followed by the Fund are: (a)
security transactions are accounted for on trade date; (b) securities traded on
national securities markets are valued at the closing prices on such markets;
securities traded in the over-the-counter market and securities for which no
sales price was reported are valued at the mean of the current bid and asked
prices; debt securities are valued using either prices or estimates of market
values provided by market makers or independent pricing services; securities
and assets for which market quotations are not readily available are valued at
fair value as determined in good faith by or under the direction of the Board
of Directors of the Fund; (c) securities maturing within 60 days are valued at
cost plus accreted discount, or minus amortized premium, which approximates
market value; (d) dividend income is recorded on the ex-dividend date; (e)
interest income, adjusted for accretion of original issue and market discount,
is recorded on the accrual basis; (f) gains or losses on the sale of securities
are calculated by using the specific identification method; (g) dividends and
distributions to shareholders are recorded on the ex-dividend date; (h) the
accounting records are maintained in U.S. dollars. All assets and liabilities
denominated in foreign currencies are translated into U.S. dollars based on the
rate of exchange of such currencies against U.S. dollars on the date of
valuation. Purchases and sales of securities, and income and expenses are
translated at the rate of exchange quoted on the respective date that such
transactions are recorded. Differences between income and expense amounts
recorded and collected or paid are recorded as currency gains or losses;
(i) the character of income and gains to be distributed are determined in
accordance with income tax regulations which may differ from generally accepted
accounting principles. At December 31, 1999, reclassifications were made to the
Fund's capital accounts to reflect permanent book/tax differences and income
and gains available for distributions under income tax regulations. Net
investment income, net realized gains and net assets were not affected by this
change; (j) the Fund intends to comply with the applicable provisions of the
Internal Revenue Code of 1986, as amended, pertaining to regulated investment
companies and to make distributions of taxable income sufficient to relieve the
Fund from substantially all Federal income and excise taxes; and (k) estimates
and assumptions are required to be made regarding assets, liabilities and
changes in net assets resulting from operations when financial statements are
prepared. Changes in the economic environment, financial markets and any other
parameters used in determining these estimates could cause actual results to
differ.
Organization costs amounting to $31,250 were incurred with the organization of
the Fund. These costs are being amortized ratably over a five year period from
commencement of operations.
2. Management Agreement and Transactions with Affiliated Persons
Salomon Brothers Asset Management Inc ("SBAM"), a wholly owned subsidiary of
Salomon Brothers Holding Company Inc., which, in turn, is a wholly owned
subsidiary of Salomon Smith Barney Holdings, Inc. ("SSBH"), acts as investment
manager to the Fund. Under the investment management agreement, the Fund pays
an investment management fee calculated at the annual rate of 0.75% of its
average daily net assets. This fee is calculated daily and paid monthly.
Salomon Brothers Asset Management, Ltd. ("SBAM Ltd."), an affiliate of SBAM,
provides certain advisory services to SBAM for the benefit of the Fund. SBAM
Ltd. is compensated by SBAM at no additional expense of the Fund.
For the six months ended June 30, 2000, SBAM waived a portion of its management
fees amounting to $26,216.
14
<PAGE>
Notes to Financial Statements
(unaudited) (continued)
SBAM also acts as administrator to the Fund. As compensation for its services
the Fund pays SBAM a fee calculated at an annual rate of 0.05% of its average
daily net assets. This fee is calculated daily and paid monthly. SBAM has
delegated its responsibilities as administrator to SSB Citi Fund Management LLC
("SSBC"), an affiliate of SBAM, pursuant to a Sub-Administration Agreement
between SBAM and SSBC.
CFBDS, Inc. acts as the Fund's distributor. For the six months ended June 30,
2000, Salomon Smith Barney Inc., another subsidiary of SSBH, did not receive
any brokerage commissions from the Fund.
3. Investments
During the six months ended June 30, 2000, the aggregate cost of purchases and
proceeds from sales of investments (including maturities, but excluding short-
term securities) were as follows:
<TABLE>
<S> <C>
Purchases:
U.S. government agencies & obligations.......................... $ 3,564,802
Other investment securities..................................... 7,636,333
-----------
$11,201,135
===========
Sales:
U.S. government agencies & obligations.......................... $ 1,606,659
Other investment securities..................................... 8,228,389
-----------
$ 9,835,048
===========
At June 30, 2000, the aggregate gross unrealized appreciation and depreciation
of investments for Federal income tax purposes were substantially as follows:
Gross unrealized appreciation..................................... $ 289,588
Gross unrealized depreciation..................................... (939,752)
-----------
Net unrealized depreciation....................................... $ (650,164)
===========
</TABLE>
4. Repurchase Agreements
The Fund purchases (and its custodian takes possession of) U.S. government se-
curities from banks and securities dealers subject to agreements to resell the
securities to the seller at a future date (generally, the next business day) at
an agreed-upon higher repurchase price. The Fund requires maintenance of the
market value of the collateral in amounts at least equal to the repurchase
price.
5. Reverse Repurchase Agreements
The Fund may enter into reverse repurchase agreements. A reverse repurchase
agreement involves a sale by the Fund of securities that it holds with an
agreement by the Fund to repurchase the same securities at an agreed upon price
and date. A reverse repurchase agreement involves risk that the market value of
the securities sold by the Fund may decline below the repurchase price of the
securities. The Fund will establish a segregated account with its custodian, in
which the Fund will maintain cash or other liquid securities with respect to
the reverse repurchase agreements.
During the six months ended June 30, 2000, the Fund did not enter into any re-
verse repurchase agreements.
15
<PAGE>
Notes to Financial Statements
(unaudited) (continued)
6. Forward Foreign Currency Contracts
At June 30, 2000, the Fund had open forward foreign currency contracts as de-
scribed below. The Fund bears the market risk that arises from changes in for-
eign currency exchange rates. The unrealized gain (loss) on the contracts re-
flected in the accompanying financial statements were as follows:
<TABLE>
<CAPTION>
Local Market Settlement Unrealized
Currency Value Date Gain (Loss)
Forward Foreign Currency Contracts ---------- -------- ---------- -----------
<S> <C> <C> <C> <C>
To Buy:
British Pound .................... 19,852 $ 30,071 7/28/00 $ 4
Canadian Dollar .................. 200,000 135,081 7/28/00 (347)
Canadian Dollar .................. 90,988 61,454 7/28/00 306
Canadian Dollar .................. 10,000 6,754 7/28/00 47
Euro ............................. 130,222 125,066 7/28/00 4,230
Euro ............................. 31,938 30,674 7/28/00 1,937
Euro ............................. 257,978 247,764 7/28/00 10,580
Euro ............................. 10,000 9,604 7/28/00 129
Euro ............................. 118,272 113,590 7/28/00 143
Greek Drachma .................... 44,903,000 127,611 7/28/00 5,768
Japanese Yen ..................... 15,683,938 149,059 7/28/00 3,838
Swedish Krona .................... 1,110,754 126,933 7/28/00 3,241
-------
29,876
-------
To Sell:
British Pound .................... 20,012 30,313 7/28/00 (314)
Canadian Dollar .................. 200,000 135,081 7/28/00 228
Canadian Dollar .................. 110,000 74,295 7/28/00 241
Canadian Dollar .................. 14,841 10,024 7/28/00 (24)
Euro ............................. 169,330 162,626 7/28/00 (2,626)
Euro ............................. 54,996 52,819 7/28/00 (2,819)
Euro ............................. 80,000 76,833 7/28/00 (4,963)
Euro ............................. 23,736 22,797 7/28/00 (1,306)
Greek Drachma .................... 44,903,000 127,611 7/28/00 (7,389)
Japanese Yen ..................... 6,817,576 64,794 7/28/00 697
Japanese Yen ..................... 10,770,000 102,358 7/28/00 (2,358)
Polish Zloty ..................... 640,540 145,728 7/28/00 (940)
Polish Zloty ..................... 90,300 20,544 7/28/00 (544)
Swedish Krona .................... 1,180,530 134,906 7/28/00 (4,906)
-------
(27,023)
-------
Forward Foreign Cross Currency Con-
tracts *
<CAPTION>
Market Value
To Buy: -------------------
Canadian
Dollar Euro
---------- --------
<S> <C> <C> <C> <C>
Canadian Dollar vs. Euro........... $ 16,111 $ 16,380 7/28/00 (269)
<CAPTION>
Japanese
Euro Yen
---------- --------
<S> <C> <C> <C> <C>
Euro vs. Japanese Yen.............. $ 9,604 $ 9,583 7/28/00 21
42,030 41,817 7/28/00 213
<CAPTION>
Japanese
Yen Euro
---------- --------
<S> <C> <C> <C> <C>
Japanese Yen vs. Euro.............. $ 69,416 $ 69,179 7/28/00 237
<CAPTION>
Polish
Zloty Euro
---------- --------
<S> <C> <C> <C> <C>
Polish Zloty vs. Euro.............. $119,617 $123,250 7/28/00 (3,633)
46,655 46,402 7/28/00 253
</TABLE>
16
<PAGE>
Notes to Financial Statements
(unaudited) (continued)
<TABLE>
<CAPTION>
Settlement Unrealized
Date Gain (Loss)
---------- -----------
Market Value
-------------------
Swedish
Krona Euro
--------- ---------
<S> <C> <C> <C> <C>
Swedish Krona vs. Euro.............. $7,974 $8,047 7/28/00 $ (73)
-------
(3,251)
-------
Net Unrealized Loss on Open Forward Foreign &
Cross Currency Contracts.......................................... $ (398)
=======
* Local currency on Cross Currency Forwards
Buy Sell
--------- ---------
Buy Canadian Dollar vs. Euro ....... 23,853 17,055
Buy Euro vs. Japanese Yen .......... 10,000 1,008,270
Buy Euro vs. Japanese Yen .......... 43,763 4,400,000
Buy Japanese Yen vs. Euro .......... 7,303,936 72,031
Buy Polish Zloty vs. Euro .......... 525,770 128,331
Buy Polish Zloty vs. Euro .......... 205,071 48,315
Buy Swedish Krona vs. Euro ......... 69,776 8,378
</TABLE>
7. Options Contracts
The Fund may from time to time enter into options contracts. Premiums paid when
put or call options are purchased by the Fund, represent investments, which are
marked-to-market daily. When a purchased option expires, the Fund will realize
a loss in the amount of the premium paid. When the Fund enters into a closing
sales transaction, the Fund will realize a gain or loss depending on whether
the proceeds from the closing sales transaction are greater or less than the
premium paid for the option. When the Fund exercises a put option, it will re-
alize a gain or loss from the sale of the underlying security and the proceeds
from such sale will be decreased by the premium originally paid. When the Fund
exercises a call option, the cost of the security which the Fund purchases upon
exercise will be increased by the premium originally paid.
At June 30, 2000, the Fund did not have any open purchased call or put option
contracts.
When the Fund writes a call or put option, an amount equal to the premium re-
ceived by the Fund is recorded as a liability, the value of which is marked-to-
market daily. When a written option expires, the Fund realizes a gain equal to
the amount of the premium received. When the Fund enters into a closing pur-
chase transaction, the Fund realizes a gain or loss depending upon whether the
cost of the closing transaction is greater or less than the premium originally
received, without regard to any unrealized gain or loss on the underlying secu-
rity, and the liability related to such option is eliminated. When a written
call option is exercised the proceeds of the security sold will be increased by
the premium originally received. When a written put option is exercised, the
amount of the premium originally received will reduce the cost of the security
which the Fund purchased upon exercise. When written index options are exer-
cised, settlement is made in cash.
The Fund enters into options for hedging purposes. The risk associated with
purchasing options is limited to the premium originally paid. The risk in
writing a covered call option is that the Fund gives up the opportunity to
participate in any increase in the price of the underlying security beyond the
exercise price. The risk in writing a put option is that the Fund is exposed to
the risk of loss if the market price of the underlying security declines.
During the six months ended June 30, 2000, the Fund did not write any call or
put option contracts.
17
<PAGE>
Notes to Financial Statements
(unaudited) (continued)
8. Securities Traded on a When Issued Basis
The Fund may from time to time purchase securities on a when-issued basis. In a
when-issued transaction, the Fund commits to purchasing securities which have
not yet been issued by the issuer. Securities purchased on a when-issued basis,
are not settled until they are delivered to the Fund. Beginning on the date the
Fund enters into the when-issued transaction, cash or other liquid securities
are segregated to cover the amount of the purchase price of the when-issued
security. These transactions are subject to market fluctuations and their
current value is determined in the same manner as for other securities.
At June 30, 2000, the Fund did not hold any when-issued securities.
9. Securities Traded on a To-Be-Announced Basis
The Fund may trade securities on a to-be-announced ("TBA") basis. In a TBA
transaction, the Fund commits to purchasing or selling securities which have
not yet been issued by the issuer, particularly the face amount and maturity
date in Government National Mortgage Association ("GNMA") transactions.
Securities purchased on a TBA basis are not settled until they are delivered to
the Fund, normally 15 to 45 days later. Beginning on the date the Fund enters
into a TBA transaction, cash or other liquid securities are segregated in the
amount of the TBA transaction. These transactions are subject to market
fluctuations and their current value is determined in the same manner as for
other securities.
At June 30, 2000, the Fund held TBA securities with a total cost of $6,200,335.
10. Mortgage Dollar Roll Transactions
The Fund may enter into mortgage "dollar rolls" in which the Fund sells
mortgage-backed securities for delivery in the current month and simultaneously
contracts to repurchase substantially similar (same type, coupon and maturity)
securities on a specific future date. The Fund is compensated by a fee paid by
the counterparty. Dollar rolls are accounted for as financing arrangements; the
fee is accrued into interest income ratably over the term of the dollar roll
and any gain or loss on the roll is deferred until disposition of the rolled
security. The average daily balance of dollar rolls outstanding during the six
months ended June 30, 2000 was approximately $4,598,000.
11. Lending of Securities
The Fund may lend its securities to brokers, dealers and other financial
organizations. The Fund has an agreement with its custodian whereby the
custodian may lend securities owned by the Fund to brokers, dealers and other
financial organizations. Fees earned by the Fund on securities lending are
recorded in interest income. Loans of securities by the Fund are collateralized
by cash or other liquid securities that are maintained at all times in an
amount at least equal to the current market value of the loaned securities,
plus a margin which may vary depending on the type of securities loaned. The
custodian establishes and maintains the collateral in a segregated account. The
Fund maintains exposure for the risk of any losses in the investment of amounts
received as collateral.
At June 30, 2000, the Fund did not have any securities on loan.
18
<PAGE>
Notes to Financial Statements
(unaudited) (continued)
12. Loan Participations
The Fund may invest in loans arranged through private negotiation between one
or more financial institutions. The Fund's investment in any such loan may be
in the form of a participation in or an assignment of the loan.
In connection with purchasing participations, the Fund generally will have no
right to enforce compliance by the borrower with the terms of the loan
agreement relating to the loan, nor any rights of set-off against the borrower,
and the Fund may not benefit directly from any collateral supporting the loan
in which it has purchased the participation. As a result, the Fund will assume
the credit risk of both the borrower and the lender that is selling the
participation. In the event of the insolvency of the lender selling the
participation, the Fund may be treated as a general creditor of the lender and
may not benefit from any set-off between the lender and the borrower.
At June 30, 2000, the Fund held loan participations with a total cost of
$177,151.
13. Capital Loss Carryforward
At December 31, 1999, the Fund had for Federal income tax purposes approxi-
mately $5,000 of capital loss carryforwards available to offset future realized
gains through December 31, 2007. To the extent that these capital carryforward
losses are used to offset capital gains, it is probable that the gains so off-
set will not be distributed.
14. Capital Stock
At June 30, 2000, the Series had 10,000,000,000 shares of capital stock
authorized with a par value of $0.001 per share. Each share represents an equal
proportionate interest and has an equal entitlement to any dividends and
distributions made by the Fund.
Transactions in shares were as follows:
<TABLE>
<CAPTION>
Six Months Ended Year Ended
June 30, 2000 December 31, 1999
---------------- -----------------
<S> <C> <C>
Shares sold............. 589,112 1,704,962
Shares issued on
reinvestment of
dividends.............. -- 86,532
Shares reacquired....... (344,077) (1,091,851)
-------- ----------
Net Increase............ 245,035 699,643
======== ==========
</TABLE>
19
<PAGE>
Financial Highlights
For a share of capital stock outstanding throughout each year ended December
31, except where noted:
<TABLE>
<CAPTION>
2000(1) 1999 1998(2)
------- ------- -------
<S> <C> <C> <C>
Net Asset Value,
Beginning of Period..... $9.66 $10.13 $10.00
------- ------- -------
Income (Loss) From
Operations:
Net investment income
(3).................... 0.34 0.60 0.38
Net realized and
unrealized gain
(loss)................. (0.10) (0.56) 0.24
------- ------- -------
Total Income From
Operations............. 0.24 0.04 0.62
------- ------- -------
Less Distributions From:
Net investment income... -- (0.51) (0.47)
Net realized gains...... -- -- (0.01)
Capital................. -- -- (0.01)
------- ------- -------
Total Distributions..... -- (0.51) (0.49)
------- ------- -------
Net Asset Value, End of
Period.................. $9.90 $9.66 $10.13
======= ======= =======
Total Return (4)......... 2.48%++ 0.37% 6.18%++
Net Assets, End of Period
(000s).................. $19,556 $16,709 $10,438
Ratios to Average Net
Assets:
Expenses (3)(5)......... 1.00%+ 1.00% 1.00%+
Net investment income... 7.48%+ 7.19% 6.23%+
Portfolio Turnover Rate.. 59% 120% 84%
</TABLE>
------
(1) For the six months ended June 30, 2000 (unaudited).
(2) For the period from February 17, 1998 (commencement of operations) through
December 31, 1998.
(3) SBAM has waived all or a portion of its management fees for the six months
ended June 30, 2000, the year ended December 31, 1999 and the period ended
December 31, 1998. In addition, SBAM has reimbursed the Fund for $2,558 for
the period ended December 31, 1998. If such fees were not waived or ex-
penses not reimbursed, the per share decrease in net investment income and
the actual expense ratio would have been as follows:
<TABLE>
<CAPTION>
Expense Ratios Without
Net Investment Income Fee Waiver and
Per Share Decreases Expense Reimbursement
--------------------- ----------------------
<S> <C> <C>
2000.......................... $0.01 1.30%+
1999.......................... 0.06 1.48
1998.......................... 0.04 1.79+
</TABLE>
(4) Total returns do not reflect expenses associated with the separate account
such as administrative fees, account charges and surrender charges which,
if reflected would reduce the total returns for all periods shown. Total
returns may also reflect a voluntary expense cap imposed by Salomon Broth-
ers Asset Management Inc to limit total Fund operating expenses. Absent
this expense cap, total returns for the Fund would be lower. Expense caps
may be revised or terminated.
(5) As a result of a voluntary expense limitation, expense ratios will not ex-
ceed 1.00%.
++ Total return is not annualized, as it may not be representative of the to-
tal return for the year.
+ Annualized.
20
<PAGE>
Salomon Brothers Variable Series Funds Inc
INVESTMENT MANAGER
Salomon Brothers Asset Management Inc
7 World Trade Center
New York, New York 10048
CUSTODIAN
PFPC Trust Company
8800 Tinicom Blvd., Suite 200
Philadelphia, Pennsylvania 19153
LEGAL COUNSEL
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, New York 10017
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
Directors
CHARLES F. BARBER
Consultant; formerly Chairman; ASARCO Incorporated
CAROL L. COLMAN
Consultant, Colman Consulting
DANIEL P. CRONIN
Vice President-General Counsel,
Pfizer International Inc.
HEATH B. MCLENDON
Chairman and President;
Managing Director, Salomon Smith Barney Inc.
President and Director, SSB Citi Fund Management LLC
and Travelers Investment Advisers, Inc.
Officers
HEATH B. MCLENDON
Chairman and President
LEWIS E. DAIDONE
Executive Vice President and Treasurer
ROSS S. MARGOLIES
Executive Vice President
BETH A. SEMMEL
Executive Vice President
PETER J. WILBY
Executive Vice President
GEORGE J. WILLIAMSON
Executive Vice President
JOHN B. CUNNINGHAM
Vice President
ANTHONY PACE
Controller
CHRISTINA T. SYDOR
Secretary
<PAGE>
---------------
Salomon Brohers
---------------
Asset Management
SEVEN WORLD TRADE CENTER . NEW YORK, NEW YORK 10048
<PAGE>
SALOMON BROTHERS
Variable Series Funds Inc
Semi-
Annual
Report
2000
JUNE 30, 2000
* SMALL CAP
GROWTH FUND
[GRAPHIC]
<PAGE>
[GRAPHIC]
SALOMON BROTHERS VARIABLE SERIES FUNDS INC
Our Message to You
DEAR SHAREHOLDER:
We are pleased to provide the semi-annual report for the Salomon Brothers
Variable Small Cap Growth Fund ("Fund") for the period ended June 30, 2000. This
letter discusses general economic and market conditions as well as Fund
highlights during the reporting period. A detailed summary of performance and
current Fund holdings can be found in the appropriate sections that follow. We
hope you find this report useful and informative.
INVESTMENT STRATEGY & PERFORMANCE UPDATE
The Fund seeks long-term growth of capital. The Fund seeks to achieve its
objective by investing primarily in securities of companies with market
capitalizations similar to that of companies included in the Russell 2000
Index(1). For the six months ended June 30, 2000, the Fund returned 21.58%. In
comparison, the Russell 2000 Index returned 3.04% and the Russell 2000 Growth
Index(2)returned 1.23% for the same period. (Please note, past performance is
not indicative of future results. Additionally, index returns do not represent
the Fund's yield.)
MARKET OVERVIEW & PORTFOLIO HIGHLIGHTS
The Fund returned 21.58% during the first half of 2000, significantly
outperforming the Russell 2000 Growth Index in a volatile market. The period was
marked by an early-year surge in technology and biotech stocks followed by a
significant April and May sell-off in the same stocks. Small capitalization
stocks outperformed large capitalization stocks during the first six months of
the year; the Russell 2000 Growth Index rose 1.23% versus a 0.43% decline for
the Standard & Poor's 500 Index(3)("S&P 500"), while the overall Russell 2000
Index rose 3.04%. Consumer cyclicals, technology and media/telecom stocks were,
in our view, the main negative factors, while healthcare and energy stocks
posted strong positive returns. The Fund outperformed its benchmark due to stock
selection in technology, communications, healthcare and financials. The Fund was
about evenly weighted in technology, the benchmark's largest sector, during the
first half of 2000.
------------------
1 The Russell 2000 Index measures the performance of the 2,000 smallest
companies in the Russell 3000 Index, which represents approximately 8% of
the total market capitalization of the Russell 3000 Index. An investor
cannot invest directly in an index.
2 The Russell 2000 Growth Index measures the performance of those Russell
2000 companies with higher price-to-book ratios and higher forecasted
growth values. (A price-to-book ratio is the price of a stock dividend
divided by its net asset value.) An investor cannot invest directly in an
index.
3 The S&P 500 is a market capitalization-weighted measure of 500 widely held
common stocks. An investor cannot invest directly in an index.
1
<PAGE>
MARKET OUTLOOK
As we enter the second half of 2000, market volatility continues but we have
seen a broader-based market than the tech-driven one of late 1999 and early 2000
period. Inflows to small cap mutual funds have slowed from a robust first
quarter pace, but so has the Initial Public Offerings ("IPO") calendar, thereby
avoiding excess supply overhang. We believe that relative valuations versus
large cap stocks are still attractive by most historical measures. We remain
broadly diversified across market sectors, which has helped to limit performance
volatility so far in 2000. While it may be a sound strategy, diversification
does not assure against market loss.
Thank you for your investment in the Salomon Brothers Variable Small Cap Growth
Fund. We look forward to helping you pursue your financial goals in the coming
years.
Sincerely,
/s/ Heath B. McLendon /s/ Matthew P. Ziehl
Heath B. McLendon Matthew P. Ziehl
Chairman and President Vice President
Member of Small Cap Growth
Portfolio Management Team
July 10, 2000
2
<PAGE>
The following graph depicts the performance of the Small Cap Growth Fund versus
the Russell 2000 Index. It is important to note that the Fund is a
professionally managed mutual fund while the index is not available for
investment and is unmanaged. The comparison is shown for illustrative purposes
only.
HISTORICAL PERFORMANCE (unaudited)
SALOMON BROTHERS VARIABLE SMALL CAP GROWTH FUND
Comparison of $10,000 Investment in the Fund with
Russell 2000 Index
[GRAPH]
Small Cap Growth Fund Russell 2000 Index
11/8/99 10,000 10,000
Dec-99 12,160 11,132
Feb-00 14,780 12,762
Apr-00 13,890 11,204
Jun-00 14,784 11,470
Past performance is not predictive of future performance. The graph does not
reflect expenses associated with the separate account such as administrative
fees, account charges and surrender charges which, if reflected, would reduce
the performance shown.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Historical Performance
------------------------------------------------------------------------------------------------------------------------------------
Net Asset Value
-------------------------
<S> <C> <C> <C> <C> <C>
Beginning End Income Capital Gain Total
Period Ended of Period of Period Dividend Distributions Returns+++
====================================================================================================================================
6/30/00 $12.16 $14.55 $0.00 $0.22 21.58%
------------------------------------------------------------------------------------------------------------------------------------
Inception* -- 12/31/99 10.00 12.16 0.00 0.00 21.60
====================================================================================================================================
$0.00 $0.22
====================================================================================================================================
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Average Annual Total Returns+
------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Six Months Ended 6/30/00++ 21.58%
------------------------------------------------------------------------------------------------------------------------------------
Inception* through 6/30/00 47.84
====================================================================================================================================
------------------------------------------------------------------------------------------------------------------------------------
Cumulative Total Return+
------------------------------------------------------------------------------------------------------------------------------------
Inception* through 6/30/00 47.84%
====================================================================================================================================
</TABLE>
+ Assumes the reinvestment of all dividends and capital gains distributions
at net asset value. Total returns do not reflect expenses associated with
the separate account such as administrative fees, account charges and
surrender charges which, if reflected, would reduce the total returns for
all periods shown. Total returns may also reflect a voluntary expense cap
imposed by Salomon Brothers Asset Management Inc to limit total Fund
operating expenses. Absent this expense cap, total returns for the Fund
would be lower. Expense caps may be revised or terminated.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
* Inception date is November 8, 1999.
3
<PAGE>
Schedule of Investments
June 30, 2000 (unaudited)
<TABLE>
<CAPTION>
Shares Security Value
<C> <S> <C>
-------------------------------------------------------------------------------
COMMON STOCK -- 86.2%
Basic Industries -- 4.7%
5,100 AK Steel Holding Corp. ................................. $ 40,800
2,700 The Geon Co. ........................................... 49,950
2,300 OM Group, Inc. ......................................... 101,200
3,900 Steel Dynamics, Inc.*................................... 35,344
----------
227,294
----------
Communications -- 8.1%
1,500 Cox Radio, Inc., Class A Shares*........................ 42,000
3,400 Dobson Communications Corp., Class A Shares*............ 65,450
2,500 Electric Lightwave, Inc., Class A Shares*............... 46,719
800 Entercom Communications Corp.*.......................... 39,000
2,300 ICG Communications, Inc.*............................... 50,744
600 Intermedia Communications Inc.*......................... 17,850
300 On Command Corp.*....................................... 4,275
600 Pac-West Telecom, Inc.*................................. 12,000
400 Pegasus Communications Corp.*........................... 19,625
Rogers Cantel Mobile Communications Inc., Class B
600 Shares*................................................. 20,175
3,400 Sinclair Broadcast Group, Inc., Class A Shares*......... 37,400
600 US Unwired Inc., Class A Shares*........................ 7,800
400 XM Satellite Radio Holdings Inc., Class A Shares*....... 14,975
600 Young Broadcasting Inc., Class A Shares*................ 15,412
----------
393,425
----------
Consumer -- 15.4%
4,900 Abercrombie & Fitch Co., Class A Shares*................ 59,719
1,100 Charles River Associates Inc.*.......................... 19,387
1,100 Coca-Cola Bottling Co. Consolidated..................... 50,050
1,900 Cost Plus, Inc.*........................................ 54,506
700 Darden Restaurants, Inc. ............................... 11,375
1,900 DeVry, Inc.*............................................ 50,231
1,200 FactSet Research Systems Inc............................ 33,900
2,500 Fossil, Inc.*........................................... 48,594
2,000 Hooper Holmes, Inc.*.................................... 16,000
1,600 MAXIMUS, Inc.*.......................................... 35,400
2,900 Michael Foods, Inc.*.................................... 71,050
1,200 On Assignment, Inc.*.................................... 36,600
2,700 The Profit Recovery Group International, Inc.*.......... 44,887
700 QRS Corp.*.............................................. 17,194
1,400 Station Casinos, Inc.*.................................. 35,000
2,400 Sun International Hotels Ltd.*.......................... 48,000
1,000 THQ Inc.*............................................... 12,187
800 Trex Co., Inc.*......................................... 40,000
3,600 Wendy's International, Inc. ............................ 64,125
----------
748,205
----------
Energy -- 4.9%
4,100 3TEC Energy Corp.*...................................... 41,000
1,400 Caminus Corp.*.......................................... 34,300
1,300 Frontier Oil Corp. ..................................... 10,400
1,100 Paradigm Geophysical Ltd.*.............................. 6,600
1,600 Pogo Producing Co....................................... 35,400
2,050 SEACOR SMIT Inc.*....................................... 79,309
3,400 Tesoro Petroleum Corp.*................................. 34,425
----------
241,434
----------
</TABLE>
See Notes to Financial Statements.
4
<PAGE>
Schedule of Investments
June 30, 2000 (unaudited) (continued)
<TABLE>
<CAPTION>
Shares Security Value
<C> <S> <C>
--------------------------------------------------------------------------------
Financial Services -- 7.6%
3,100 Banknorth Group, Inc..................................... $ 47,469
1,700 Commerce Bancorp, Inc.................................... 78,200
500 Cousins Properties, Inc.................................. 19,250
1,100 Legg Mason, Inc.......................................... 55,000
1,900 Mercantile Bankshares Corp. ............................. 56,644
1,900 Protective Life Corp. ................................... 50,587
600 PS Business Parks, Inc., Class A Shares.................. 14,400
1,800 Westamerica Bancorporation............................... 47,025
----------
368,575
----------
Health Care -- 6.7%
1,500 Alpharma Inc., Class A Shares............................ 93,375
300 ArthroCare Corp.*........................................ 15,975
5,000 Biota Holdings Ltd.*..................................... 10,387
1,800 Cyberonics, Inc.*........................................ 21,600
300 Data Critical Corp.*..................................... 3,900
2,800 Health Management Associates, Inc., Class A Shares*...... 36,575
100 Invitrogen Corp.*........................................ 7,520
500 Laboratory Corp. of America Holdings*.................... 38,562
1,100 Novoste Corp.*........................................... 67,100
500 NPS Pharmaceuticals, Inc.*............................... 13,375
300 ORATEC Interventions, Inc.*.............................. 10,012
1,700 Quidel Corp.*............................................ 8,925
----------
327,306
----------
Technology -- 38.8%
2,100 Advanced Fibre Communications, Inc.*..................... 95,156
1,400 Aeroflex Inc.*........................................... 69,563
1,400 ANTEC Corp.*............................................. 58,187
400 Applied Micro Circuits Corp.*............................ 39,500
1,500 Applied Science and Technology, Inc.*.................... 38,813
3,300 ASM International N.V.*.................................. 87,450
1,300 Celeritek, Inc.*......................................... 53,056
400 Commerce One, Inc.*...................................... 18,156
1,400 CommScope, Inc.*......................................... 57,400
3,400 Digital Microwave Corp.*................................. 129,625
100 Exfo Electro-Optical Engineering Inc.*................... 4,388
1,500 Inet Technologies, Inc.*................................. 81,375
1,700 Insight Enterprises, Inc.*............................... 100,831
2,300 Integrated Silicon Solutions, Inc.*...................... 87,400
1,700 Latitude Communications, Inc.*........................... 19,019
100 Marvell Technology Group Ltd.*........................... 5,700
1,700 Network Appliance, Inc.*................................. 136,850
1,000 Newport Corp............................................. 107,375
600 NHC Communications Inc.*................................. 4,535
1,400 Organic, Inc.*........................................... 13,650
1,900 P-Com, Inc.*............................................. 10,806
500 Polycom, Inc.*........................................... 47,047
2,900 Quintus Corp.*........................................... 57,592
2,400 Razorfish, Inc., Class A Shares*......................... 38,550
1,500 Sawtek Inc.*............................................. 86,344
1,100 Siebel Systems, Inc.*.................................... 179,919
800 Silicon Storage Technology, Inc.*........................ 70,650
2,500 Snowball.com, Inc.*...................................... 12,188
</TABLE>
See Notes to Financial Statements.
5
<PAGE>
Schedule of Investments
June 30, 2000 (unaudited) (continued)
<TABLE>
<CAPTION>
Shares Security Value
<C> <S> <C>
-------------------------------------------------------------------------------
Technology -- 38.8% (continued)
600 TranSwitch Corp.*...................................... $ 46,313
300 Ulticom, Inc.*......................................... 7,205
1,100 Valence Technology, Inc.*.............................. 20,281
1,900 Viant Corp.*........................................... 56,288
3,100 Viasystems Group, Inc.*................................ 50,181
----------
1,891,393
----------
TOTAL COMMON STOCK
(Cost -- $3,742,946)................................... 4,197,632
----------
<CAPTION>
Face
Amount
------
<C> <S> <C>
CONVERTIBLE CORPORATE BONDS+ -- 2.9%
Health Care -- 2.9%
$ 70,000 Invitrogen Corp., 5.500% due 3/1/07.................... 74,288
45,000 Vertex Pharmaceuticals Inc., 5.000% due 3/14/07........ 64,519
----------
TOTAL CONVERTIBLE CORPORATE BONDS
(Cost -- $105,732)..................................... 138,807
----------
Contracts
---------
PURCHASED OPTIONS -- 0.3%
Russell 2000 Index, Call @ $480, Expire 7/22/00*
4 (Cost -- $22,262)...................................... 16,950
----------
SUB-TOTAL INVESTMENTS
(Cost -- $3,870,940)................................... 4,353,389
----------
<CAPTION>
Face
Amount
------
<C> <S> <C>
REPURCHASE AGREEMENT -- 10.6%
$ 518,000 SBC Warburg Dillon Read Inc., 6.550% due 7/3/00;
Proceeds at maturity -- $518,283; (Fully
collateralized by U.S. Treasury Bonds, 9.125% due
5/15/18; Market value -- $529,635) (Cost --
$518,000)............................................ 518,000
----------
TOTAL INVESTMENTS -- 100%
(Cost -- $4,388,940**)................................. $4,871,389
==========
</TABLE>
------
* Non-income producing security.
+ Security is exempt from registration under Rule 144A of the Securities Act
of 1933. This security may be resold in transaction that are exempt from
registration, normally to qualified institutional buyers.
** Aggregate cost for Federal income tax purposes is substantially the same.
See Notes to Financial Statements.
6
<PAGE>
Statement of Assets and Liabilities
June 30, 2000 (unaudited)
<TABLE>
<S> <C>
ASSETS:
Investments, at value (Cost -- $3,870,940)........................ $4,353,389
Repurchase agreement, at value (Cost -- $518,000)................. 518,000
Cash.............................................................. 743
Receivable for securities sold.................................... 179,636
Receivable from investment manager................................ 48,788
Dividends and interest receivable................................. 2,126
----------
Total Assets...................................................... 5,102,682
----------
LIABILITIES:
Payable for securities purchased.................................. 334,643
Administration fee payable........................................ 180
Accrued expenses.................................................. 35,700
----------
Total Liabilities................................................. 370,523
----------
Total Net Assets................................................... $4,732,159
==========
NET ASSETS:
Par value of capital shares....................................... $ 325
Capital paid in excess of par value............................... 3,963,895
Accumulated net investment loss................................... (5,642)
Accumulated net realized gain from security transactions, options
and foreign currencies........................................... 291,148
Net unrealized appreciation of investments and foreign
currencies....................................................... 482,433
----------
Total Net Assets................................................... $4,732,159
==========
Shares Outstanding................................................. 325,143
----------
Net Asset Value, per share......................................... $14.55
----------
</TABLE>
See Notes to Financial Statements.
7
<PAGE>
Statement of Operations
For the Six Months Ended June 30, 2000 (unaudited)
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest............................................................ $ 12,852
Dividends........................................................... 5,138
--------
Total Investment Income............................................. 17,990
--------
EXPENSES:
Shareholder and system servicing fees............................... 13,070
Management fees (Note 2)............................................ 11,816
Audit and legal..................................................... 9,000
Custody............................................................. 9,000
Shareholder communications.......................................... 8,000
Directors' fees..................................................... 2,375
Administration fees (Note 2)........................................ 788
Registration fees................................................... 600
Other............................................................... 1,500
--------
Total Expenses...................................................... 56,149
Less: Management fee waiver and expense reimbursement (Note 2)...... (32,517)
--------
Net Expenses........................................................ 23,632
--------
Net Investment Loss.................................................. (5,642)
--------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS, OPTIONS AND
FOREIGN CURRENCIES (NOTES 3 AND 5):
Realized Gain (Loss) From:
Security transactions (excluding short-term securities)............. 321,835
Options purchased................................................... (24,093)
Foreign currency transactions....................................... (13)
--------
Net Realized Gain................................................... 297,729
--------
Change in Net Unrealized Appreciation of Investments and Foreign
Currencies:
Beginning of period................................................. 215,171
End of period....................................................... 482,433
--------
Increase in Net Unrealized Appreciation............................. 267,262
--------
Net Gain on Investments, Options and Foreign Currencies.............. 564,991
--------
Increase in Net Assets From Operations............................... $559,349
========
</TABLE>
See Notes to Financial Statements.
8
<PAGE>
Statements of Changes in Net Assets
For the Six Months Ended June 30, 2000 (unaudited)
and the Period Ended December 31, 1999(a)
<TABLE>
<CAPTION>
2000 1999
---------- ----------
<S> <C> <C>
OPERATIONS:
Net investment income (loss).......................... $ (5,642) $ 318
Net realized gain .................................... 297,729 53,971
Increase in net unrealized appreciation............... 267,262 215,171
---------- ----------
Increase in Net Assets From Operations................ 559,349 269,460
---------- ----------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income ................................ (318) --
Net realized gains ................................... (60,552) --
---------- ----------
Decrease in Net Assets From Distributions to
Shareholders ........................................ (60,870) --
---------- ----------
FUND SHARE TRANSACTIONS (NOTE 9):
Net proceeds from sale of shares ..................... 2,514,266 1,531,686
Net asset value of shares issued for reinvestment of
dividends ........................................... 39,016 --
Cost of shares reacquired ............................ (120,428) (320)
---------- ----------
Increase in Net Assets From Fund Share Transactions .. 2,432,854 1,531,366
---------- ----------
Increase in Net Assets ................................ 2,931,333 1,800,826
NET ASSETS:
Beginning of period .................................. 1,800,826 --
---------- ----------
End of period* ....................................... $4,732,159 $1,800,826
========== ==========
* Includes accumulated net investment loss of: ........ $(5,642) --
========== ==========
* Includes undistributed net investment income of:..... -- $318
========== ==========
</TABLE>
------
(a) For the period from November 8, 1999 (commencement of operations) to Decem-
ber 31, 1999.
See Notes to Financial Statements.
9
<PAGE>
Notes to Financial Statements
(unaudited)
1. Organization and Significant Accounting Policies
Salomon Brothers Variable Small Cap Growth Fund ("Fund") is a separate
diversified investment portfolio of the Salomon Brothers Variable Series Funds
Inc ("Series") whose primary investment objective is to seek long-term growth
of capital. The Series, a Maryland corporation, is registered under the
Investment Company Act of 1940, as amended ("1940 Act"), as an open-end
management investment company and consists of this Fund and seven other
investment portfolios: Salomon Brothers Variable Capital Fund, Salomon Brothers
Variable Total Return Fund, Salomon Brothers Variable High Yield Bond Fund,
Salomon Brothers Variable Strategic Bond Fund, Salomon Brothers Variable
Investors Fund, Salomon Brothers Variable U.S. Government Income Fund and
Salomon Brothers Variable Asia Growth Fund. The U.S. Government Income Fund and
Asia Growth Fund have not yet commenced operations. The financial statements
and financial highlights for the other investment portfolios are presented in
separate shareholder reports. The Fund and each other investment portfolio of
the Series is offered exclusively for use with certain variable annuity and
variable life insurance contracts offered through the separate accounts of
various life insurance companies and qualified pension and retirement plans.
The significant accounting policies consistently followed by the Fund are: (a)
security transactions are accounted for on trade date; (b) securities traded on
national securities markets are valued at the closing prices on such markets;
securities traded in the over-the-counter market and securities for which no
sales price was reported are valued at the mean of the current bid and asked
prices; debt securities are valued using either prices or estimates of market
values provided by market makers or independent pricing services; securities
and assets for which market quotations are not readily available are valued at
fair value as determined in good faith by or under the direction of the Board
of Directors of the Fund; (c) securities maturing within 60 days are valued at
cost plus accreted discount, or minus amortized premium, which approximates
market value; (d) dividend income is recorded on the ex-dividend date; foreign
dividend income is recorded on the ex-dividend date or as soon as practical
after the Fund determines the existence of a dividend declaration after
exercising reasonable due diligence; (e) interest income, adjusted for
accretion of original issue or market discount, is recorded on the accrual
basis; (f) gains or losses on the sale of securities are calculated by using
the specific identification method; (g) dividends and distributions to
shareholders are recorded on the ex-dividend date; (h) the accounting records
are maintained in U.S. dollars. All assets and liabilities denominated in
foreign currencies are translated into U.S. dollars based on the rate of
exchange of such currencies against U.S. dollars on the date of valuation.
Purchases and sales of securities, and income and expenses are translated at
the rate of exchange quoted on the respective date that such transactions are
recorded. Differences between income and expense amounts recorded and collected
or paid are recorded as currency gains or losses; (i) the character of income
and gains to be distributed are determined in accordance with income tax
regulations which may differ from generally accepted accounting principles; (j)
the Fund intends to comply with the applicable provisions of the Internal
Revenue Code of 1986, as amended, pertaining to regulated investment companies
and to make distributions of taxable income sufficient to relieve the Fund from
substantially all Federal income and excise taxes; and (k) estimates and
assumptions are required to be made regarding assets, liabilities and changes
in net assets resulting from operations when financial statements are prepared.
Changes in the economic environment, financial markets and any other parameters
used in determining these estimates could cause actual results to differ.
2. Management Agreement and Transactions with Affiliated Persons
Salomon Brothers Asset Management Inc ("SBAM"), a wholly owned subsidiary of
Salomon Brothers Holding Co. Inc., which, in turn, is wholly owned by Salomon
Smith Barney Holdings, Inc. ("SSBH"), acts as investment manager to the Fund.
Under the investment management agreement, the Fund pays an investment
management fee calculated at the annual rate of 0.75% of its average daily net
assets. This fee is calculated daily and paid monthly.
For the six months ended June 30, 2000, SBAM waived all of its management fees
and reimbursed expenses amounting to $20,701.
10
<PAGE>
Notes to Financial Statements
(unaudited) (continued)
SBAM also acts as administrator to the Fund. As compensation for its services
the Fund pays SBAM a fee calculated at an annual rate of 0.05% of its average
daily net assets. This fee is calculated daily and paid monthly. SBAM has
delegated its responsibilities as administrator to SSB Citi Fund Management LLC
("SSBC"), an affiliate of SBAM, pursuant to a Sub-Administration Agreement
between SBAM and SSBC.
CFBDS, Inc. acts as the Fund's distributor. For the six months ended June 30,
2000, there were no brokerage commissions paid to Salomon Smith Barney Inc.
("SSB"), another subsidiary of SSBH.
3. Investments
During the six months ended June 30, 2000, the aggregate cost of purchases and
proceeds from sales of investments (including maturities, but excluding short-
term securities) were as follows:
<TABLE>
<S> <C>
Purchases............................................................ $4,398,769
==========
Sales................................................................ $2,036,994
==========
</TABLE>
At June 30, 2000, the aggregate gross unrealized appreciation and depreciation
of investments for Federal income tax purposes were substantially as follows:
<TABLE>
<S> <C>
Gross unrealized appreciation........................................ $ 755,387
Gross unrealized depreciation........................................ (272,938)
---------
Net unrealized appreciation.......................................... $ 482,449
=========
</TABLE>
4. Repurchase Agreements
The Fund purchases (and its custodian takes possession of) U.S. government
securities from banks and securities dealers subject to agreements to resell
the securities to the seller at a future date (generally, the next business
day) at an agreed-upon higher repurchase price. The Fund requires maintenance
of the market value of the collateral in amounts at least equal to the
repurchase price.
5. Options Contracts
The Fund may from time to time enter into options contracts. Premiums paid when
put or call options are purchased by the Fund, represent investments, which are
marked-to-market daily. When a purchased option expires, the Fund will realize
a loss in the amount of the premium paid. When the Fund enters into a closing
sales transaction, the Fund will realize a gain or loss depending on whether
the proceeds from the closing sales transaction are greater or less than the
premium paid for the option. When the Fund exercises a put option, it will
realize a gain or loss from the sale of the underlying security and the
proceeds from such sale will be decreased by the premium originally paid. When
the Fund exercises a call option, the cost of the security which the Fund
purchases upon exercise will be increased by the premium originally paid.
At June 30, 2000, the Fund held purchased call options with a total cost of
$22,262.
11
<PAGE>
Notes to Financial Statements
(unaudited) (continued)
When the Fund writes a call or put option, an amount equal to the premium
received by the Fund is recorded as a liability, the value of which is marked-
to-market daily. When a written option expires, the Fund realizes a gain equal
to the amount of the premium received. When the Fund enters into a closing
purchase transaction, the Fund realizes a gain or loss depending upon whether
the cost of the closing transaction is greater or less than the premium
originally received, without regard to any unrealized gain or loss on the
underlying security, and the liability related to such option is eliminated.
When a written call option is exercised the proceeds of the security sold will
be increased by the premium originally received. When a written put option is
exercised, the amount of the premium originally received will reduce the cost
of the security which the Fund purchased upon exercise. When written index
options are exercised, settlement is made in cash.
The Fund enters into options for hedging purposes. The risk associated with
purchasing options is limited to the premium originally paid. The risk in
writing a covered call option is that the Fund gives up the opportunity to
participate in any increase in the price of the underlying security beyond the
exercise price. The risk in writing a put option is that the Fund is exposed to
the risk of loss if the market price of the underlying security declines.
During the six months ended June 30, 2000, the Fund did not write any call or
put option contracts.
6. Securities Traded on a When Issued Basis
The Fund may from time to time purchase securities on a when-issued basis. In a
when-issued transaction, the Fund commits to purchasing securities which have
not yet been issued by the issuer. Securities purchased on a when-issued basis,
are not settled until they are delivered to the Fund. Beginning on the date the
Fund enters into the when-issued transaction, cash or other liquid securities
are segregated to cover the amount of the purchase price of the when-issued
security. These transactions are subject to market fluctuations and their
current value is determined in the same manner as for other securities.
At June 30, 2000, the Fund did not hold any when-issued securities.
7. Securities Traded on a To-Be-Announced Basis
The Fund may trade securities on a "to-be-announced" ("TBA") basis. In a TBA
transaction, the Fund commits to purchasing or selling securities for which
specific information is not yet known at the time of the trade, particularly
the face amount and maturity date in Government National Mortgage Association
("GNMA") transactions. Securities purchased on a TBA basis are not settled
until they are delivered to the Fund, normally 15 to 45 days later. Beginning
on the date the Fund enters into a TBA transaction, cash or other liquid
securities are segregated in the amount of the TBA transaction. These
transactions are subject to market fluctuations and their current value is
determined in the same manner as for other securities.
At June 30, 2000, the Fund did not hold any TBA securities.
12
<PAGE>
Notes to Financial Statements
(unaudited) (continued)
8. Lending of Securities
The Fund may lend its securities to brokers, dealers and other financial
organizations. The Fund has an agreement with its custodian whereby the
custodian may lend securities owned by the Fund to brokers, dealers and other
financial organizations. Fees earned by the Fund on securities lending are
recorded in interest income. Loans of securities by the Fund are collateralized
by cash or other liquid securities that are maintained at all times in an
amount at least equal to the current market value of the loaned securities,
plus a margin which may vary depending on the type of securities loaned. The
custodian establishes and maintains the collateral in a segregated account. The
Fund maintains exposure for the risk of any losses in the investment of amounts
received as collateral.
At June 30, 2000, the Fund did not have any securities on loan.
9. Capital Stock
At June 30, 2000, the Series had 10,000,000,000 shares of capital stock
authorized with a par value of $0.001 per share. Each share represents an equal
proportionate interest and has an equal entitlement to any dividends and
distributions made by the Fund.
Transactions in shares were as follows:
<TABLE>
<CAPTION>
Six Months Ended Period Ended
June 30, 2000 December 31, 1999(a)
---------------- --------------------
<S> <C> <C>
Shares sold............................. 183,238 148,068
Shares issued on reinvestment of
dividends.............................. 2,869 --
Shares reacquired....................... (9,004) (28)
------- -------
Net Increase............................ 177,103 148,040
======= =======
</TABLE>
------
(a) For the period November 8, 1999 (commencement of operations) through
December 31, 1999.
13
<PAGE>
Financial Highlights
For a share of capital stock outstanding for the period ended December 31, ex-
cept where noted:
<TABLE>
<CAPTION>
2000(1) 1999(2)
------- -------
<S> <C> <C>
Net Asset Value, Beginning of Period......................... $12.16 $10.00
------ ------
Income (Loss) From Operations:
Net investment income (loss) (3)............................ (0.02) 0.00*
Net realized and unrealized gain ........................... 2.63 2.16
------ ------
Total Income From Operations................................ 2.61 2.16
------ ------
Less Distributions From:
Net investment income....................................... (0.00)* --
Net realized gains.......................................... (0.22) --
------ ------
Total Distributions......................................... (0.22) --
------ ------
Net Asset Value, End of Period............................... $14.55 $12.16
====== ======
Total Return++ (4)........................................... 21.58% 21.60%
Net Assets, End of Period (000s)............................. $4,732 $1,801
Ratios to Average Net Assets+:
Expenses (3)(5)............................................. 1.50% 1.50%
Net investment income (loss)................................ (0.36) 0.16
Portfolio Turnover Rate...................................... 72% 16%
</TABLE>
------
(1) For the six months ended June 30, 2000 (unaudited).
(2) For the period from November 8, 1999 (commencement of operations) through
December 31, 1999.
(3) SBAM has waived all or part of its management fees for the six months ended
June 30, 2000 and the period ended December 31, 1999. In addition, SBAM has
reimbursed the Fund for $20,701 and $27,494 in expenses for the six months
ended June 30, 2000 and the period ended December 31, 1999, respectively.
If such fees were not waived and expenses not reimbursed, the per share
(increase) decrease in net investment income (loss) and the actual expense
ratio would have been as follows:
<TABLE>
<CAPTION>
Net Investment Expense Ratios Without
Income (Loss) Per Share Fee Waivers and/or
(Increase) Decreases Expense Reimbursements+
------------------------ -----------------------
<S> <C> <C>
2000............ $0.10 3.56%
1999............ 0.20 16.36
</TABLE>
(4) Total returns do not reflect expenses associated with the separate account
such as administrative fees, account charges and surrender charges which,
if reflected, would reduce the total returns for all periods shown. Total
returns may also reflect a voluntary expense cap imposed by Salomon
Brothers Asset Management Inc to limit total Fund operating expenses.
Absent this expense cap, total returns for the Fund would be lower. Expense
caps may be revised or terminated.
(5) As a result of a voluntary expense limitation, expense ratios will not
exceed 1.50%.
* Amount represents less than $0.01.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
14
<PAGE>
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<PAGE>
Salomon Brothers Variable Series Funds Inc
INVESTMENT MANAGER
Salomon Brothers Asset Management Inc
7 World Trade Center
New York, New York 10048
CUSTODIAN
PFPC Trust Company
8800 Tinicom Blvd.
Suite 200
Philadelphia, Pennsylvania 19153
LEGAL COUNSEL
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, New York 10017
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
Directors
CHARLES F. BARBER
Consultant; formerly Chairman; ASARCO Incorporated
CAROL L. COLMAN
Consultant, Colman Consulting
DANIEL P. CRONIN
Vice President-General Counsel,
Pfizer International Inc.
HEATH B. MCLENDON
Chairman and President;
Managing Director, Salomon Smith Barney Inc.
President and Director, SSB Citi Fund Management LLC
and Travelers Investment Advisers, Inc.
Officers
HEATH B. MCLENDON
Chairman and President
LEWIS E. DAIDONE
Executive Vice President and Treasurer
ROSS S. MARGOLIES
Executive Vice President
BETH A. SEMMEL
Executive Vice President
PETER J. WILBY
Executive Vice President
GEORGE J. WILLIAMSON
Executive Vice President
JOHN B. CUNNINGHAM
Vice President
ANTHONY PACE
Controller
CHRISTINA T. SYDOR
Secretary
<PAGE>
--------------------
Salomon Brothers
--------------------
Asset Management
SEVEN WORLD TRADE CENTER . NEW YORK, NEW YORK 10048
